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 94 of Risk Parity Radio. Today is time for our weekly portfolio reviews of the six sample portfolios that you can find at www.riskparityradio.com. But, First off, I'm intrigued by this, how you say, emails. And we do have some time for some emails, so the first one is here from Richard S. And Richard S writes, Frank, I know you've been getting bombarded with emails lately, including several from me, but I have another one for you. After listening to several of your previous podcast episodes on sector funds and leveraged funds, I've done some more playing around with the portfolio tools. and I'd be very interested to hear your thoughts on the following portfolio. And this portfolio has 10% in TMF, which is the leveraged long-term treasury bond fund. It has 15% in QQQ, which is the Nasdaq. It is 30% in XSVM, which is a small cap value fund with a momentum strategy attached to it. And it's got 15% in gold. 15% in short-term treasuries, SHY, and 15% in utilities with VPU for that. And Richard also writes a couple of notes for actual implementation. I would likely use BAR and SCH0 instead of GLD and SHY respectively, as they are cheaper. To backtest in portfolio charts, I had to pick something for VPU, but Total stock market is a poor substitute as they are only 0.5% correlated. I'm not sure if there's a better way to handle this. Lastly, if you move all of the short term to gold, it back tests better in portfolio charts, but I'm not sure I'm comfortable with that much gold. I love gold. So Richard, yeah, this is an interesting portfolio you put together. By adding that leveraged fund, essentially you have a portfolio that is 120% of an ordinary portfolio. But it's also a good example of a do-it-yourself portfolio. The sample portfolios on the portfolios page are just samples and they're designed to help people make their own, if they will. The sample ones are good, but you can make your own. And Richard has done that here. One thing I think you need to be mindful of, and I don't think it really affects you that much here, But when you have basically three different kinds of stock funds, one being all of the NASDAQ, which is actually very heavily weighted to the big technology companies when you look at it, and then you have a utilities fund and that's a sector fund, and then you have a small cap value fund, which is a factor fund. So there could be some overlap in those. I don't think there's a whole lot of overlap in those. But whenever you're kind of mixing and matching, say, sector funds and factor funds, then you can also have some overlaps and you want to look at that to make sure they're actually uncorrelated. I don't think you have a problem with these ones here. But what I did is I went ahead and ran this at Portfolio Visualizer and compared it with a modified golden ratio fund just for kicks and giggles. And I will link to that in the show notes. So the modified golden ratio fund that I created, I put 10% of TMF in it, just like yours. I have 20% in GLD gold, 8% in SHY, the short-term bond fund, 25% in VUG, which is a Vanguard large cap growth fund, which would overlap with QQQ. and then 25% in the small cap value fund. I used IJS for that. And then I also put 12% in a REIT and I used O for that realty income. And then I tested it to see what these two portfolios look like together. And they are very similar. They both have the same amount of leverage in them. So the compounded annual growth rate of Richard's portfolio for the time period that it's tested, which goes back to 2009 is 13. 29% and the modified golden ratio when I created the compound annual growth rate is 13.64%. So very similar. As you go down the row, you see Richard's portfolio has a best year of 25% and a worst year of -5% and a max drawdown of -11%. Very similar to this modified golden ratio I made. which is 25.15% best year, minus 3.5% for worst year in this period, and max drawdown of 12.27%. The one area where Richard's portfolio outshines the modified golden ratio portfolio I created is in the sharp ratio, which his one has a sharp ratio of 1.44 for this period compared to 1.29 for this modified golden ratio portfolio. But they are both good portfolios with a little bit of leverage. and you can see how adding just a little bit of leverage does change these a little bit and make them a bit more aggressive. But thank you for that. That's a good DIY example.

Mostly Voices [6:12]

Ain't nothing wrong with that.

Mostly Uncle Frank [6:17]

And our next email comes from Kyle and Kyle writes, Dear Frank, I was looking for advice on a strategy. I've heard some people mention but I've not heard how to implement my situation. I'm working towards financial independence and likely will be there in five to ten years. However, I do not foresee myself actually stopping work, but I desire the ability to choose to stop working or change what I'm doing without money being a consideration. As such, I'm at a hybrid financial phase as I still see my foresee myself accumulating for many more decades, but that could change and I may actually choose to live off investments much earlier. As such, I would like to be 100% in stocks as you advise young investors to be, but I do not want all the volatility. I have read and seen models of using risk style investments with leverage that on average will lead to similar returns as the market with less volatility. I'd like to construct a model like that, but I don't know how. I know you use leveraged ETF funds, but with the issues surrounding the fund decay and the risk of the portfolio becoming insolvent during Market downturns, it seems like a fairly large risk to take. Do you have any other suggestions for adding leverage so someone can replicate stock market returns with less risk in a risk parity portfolio? Thanks. Well, yes. The good news is I think I can help you. If you go back and listen to episodes 59 and 61 of this podcast, you will hear two episodes about a fund called NTSX, and that is a fund with some moderate leverage in it. And what it is comprised of is a component that is the S&P 500 and a component that is treasury bonds, but it uses some options in the treasury bond side of it to make what would be a 60/40 portfolio into effectively a 90/60 portfolio. So it's got one and a half times leverage in this. Now, in order to use that in a risk parity style portfolio, you do need to make some adjustments because the way that treasury bonds are structured in that portfolio is to cover the whole range of treasury bonds. So it's effectively got 90% stocks, 20% short-term bonds, 20% intermediate-term treasuries, and 20% long-term treasuries. So if you had $10,000 in that portfolio, it would be like having $15,000 in a portfolio that was 9,000 in stocks, 2,000 in each of the short-term, intermediate term, and long-term treasuries. If you add other funds, then you can use that to create a risk parity style portfolio. And I did a couple of those. There were some with those episodes that you can go back and look at and the links are in those show notes, but I'll also put these new ones in this show notes. And what I created, I called one of them the NTSX 30 portfolio. That's 30% NTSX, and I have one that's the NTSX 35 portfolio, which is 35% NTSX. To the NTSX 30 portfolio, I also added in 15% in TLT. Those are long-term treasuries to balance out the treasury bonds in there. It has 25% in VIoV, which is a small cap value fund, and that is to balance out the S&P 500 component of NTSX. Then it's got 20% in gold. You'll notice that's a little bit more because this portfolio is behaving as if it has about 117% in it, I'm sorry, 115% in it, as opposed to 100%. And then I just took a REIT. I took O, I made 10% in the REIT income corporation, which is O. And I also did a version of this that's 35% NTSX. And so that also has 15% in TLT, 25% in VIoV, 20% in GLD, and 5% in the REIT in that circumstance. And that performs like a portfolio with 117.5% of leverage. Now looking at these just the performance over the past and this is a short period because NTSX has not been around that long so it's only a few years but if you look at it the NTSX 30 has a compounded annual growth rate of 14. 5% the NTSX 35 is at 14.83% best years are 23 and 24 worst years are 6.6 and 7.6 to the negative max drawdowns of -13% and -12% for each of those two portfolios with sharp ratios of 1.03 for NTSX 30 and 1.06 for NTSX 35. Both of those portfolios look pretty good and are similar to a golden ratio kind of portfolio. when you break them all down because those short and intermediate term treasuries in the NTSX act kind of like your cash portion of a golden ratio portfolio. But what you might do is just play around a little bit with various portfolios with allocations of NTSX in it. You do need to balance out the other things. It does require a little bit of math, but if you keep them kind of in the proportions that I've set out in these new samples, you'll be able to see how this works and you can add a moderate amount of leverage to a portfolio without going whole hog like one of those experimental portfolios and without having to use those three times leverage portfolios. Because NTSX actually is designed for long-term holding and it only has a expense ratio of 0.2, which is very reasonable for something like that. So I think that may be the way to go for people who are looking to create one of these portfolios with some leverage in it, but not too much. We had the tools, we had the talent. I actually do think I will be adding a seventh sample portfolio that involves some NTSX in it, and we'll do that probably starting in July when we're rebalancing all the portfolios. But that will be sort of an interesting side experiment with moderate leverage. Well, I like to do the job right. And thank you for that email. Our next email comes from Chris, Chris V. Chris V. Writes, hi, I love your show. Question, if I can get to a 2. 5% withdrawal rate, do I need a risk parity or should I go 90% stocks? So I guess my question is, can you plot Safe withdrawal versus standard deviation versus return, what is the optimized point? Well, as to the latter part of your question, what you're talking about there is an efficient frontier calculation. And there is an efficient frontier calculator at Portfolio Visualizer. I don't necessarily like that calculator because it seems to give odd results to me when I create portfolios using that as opposed to just creating the kinds of portfolios that you see in the sample portfolios and then back test them. They don't seem to perform as well. But that's technically how you would approach the latter part of your question. Now, as to the first part of the question, a 2.5% withdrawal rate and 90% stocks.

Mostly Voices [14:03]

You are talking about the nonsensical ravings of a lunatic mind.

Mostly Uncle Frank [14:06]

Well, I guess what I'm wondering here is what your goals are for this because with a 2.5% withdrawal rate, even if you just held everything in cash or some kind of really conservative portfolio with maybe 20% stocks in it, you're starting with 40 years of expenses saved at 2.5%. So you could virtually hold anything. And typically, if you wanted to have that low of a withdrawal rate, You wouldn't go 90% stocks. You would go like 20% stocks or 30% stocks because you don't need to be generating that much of a return. This would be a good portfolio for somebody whose goal is to die with as much money as possible because you're still trying to accumulate. You're hardly spending anything. So what that results in is just a really big portfolio and then you'll die. and you won't spend the portfolio and whoever your heirs are, they'll get the portfolio and the advantage of your hyper accumulation. So while conceivably that could be your goal, it's not out of the question, you might want to think whether that is your goal and then construct a portfolio that actually matches more of what your real goals are. If you really just want to be really conservative, You would make a really conservative portfolio and take your 2.5% out of it. But your solution may be, let's spend more money and construct a portfolio that works better for spending more money. It happened once. Because the 90% stock portfolio is going to have a safe withdrawal rate of 4.5% and a permanent withdrawal rate of 3.5%. So it's not optimized for withdrawing. Just isn't. That's not how it works. That's not how any of this works. It's optimized for a long-term accumulation. And it's going to be very volatile, both in terms of depth of drawdown and in length of drawdown. Over the past 50 years, you've seen this kind of portfolio drop up to 46% and be down for up to 13 years.

Mostly Voices [16:17]

Real wrath of God type stuff.

Mostly Uncle Frank [16:20]

That being said, over a 40-year time horizon, it will undoubtedly outperform diversified portfolios. It just won't be very pleasant to live with.

Mostly Voices [16:30]

What is that? What is that? What is it? No, it's a beast!

Mostly Uncle Frank [16:39]

So I would go back and reevaluate what are your actual goals in life. and how your finances fit into that and then make an appropriate portfolio and withdrawal strategy for that goal and not have the withdrawal strategy and portfolio dictate your goals in life for your finances or otherwise. It's a trap.

Mostly Voices [17:04]

It's a trap. It's a trap. It's a trap.

Mostly Uncle Frank [17:10]

And hopefully that helps. All right, our next email is from Brian and Brian writes, hi Frank, I started listening to the podcast about a month ago and I'm caught up to the present. I've learned a lot. Thank you. I've intuitively been uncomfortable with high stock percentages in my portfolio. The risk parity model strikes a good balance between a reasonable expected return and too much volatility. Keep up the good work. Question, what do you think of preferred stock ETF PFFD? It has a lower expense ratio 0.23% than PFF. While its smaller size may result in wider spreads for the buy-in holder, I don't see that as much of an issue. Okay, well I did take a look at that. It is interesting. It's relatively new and it is smaller. I will link to a article in the show notes from Seeking Alpha about that and a couple other preferred shares funds. One thing you need to realize about preferred shares funds is they have different levels or percentages of qualified dividends in them. And recall one of the reasons we like to have these and have them in our taxable portfolio is they pay a qualified dividend, which is subject to the long-term capital gains tax rate, which is means it just gets taxed at a lower rate. But not all preferred shares funds are like in that respect. So PFF has one of the highest percentages of its income being paid in qualified dividends, and it was around 80% or 81% in this article. Whereas if you compare that to PFFD, PFFD comes in at 59%, and so it has a lower percentage of what are going to be qualified dividends, and then a higher percentage of ordinary income. So depending on your tax situation, PFF may still be better with a higher expense ratio than PFFD. So you can take that into consideration. As with all of the funds that we use in our sample portfolios, we're not using them necessarily because they are the best thing in their class because that changes all the time. And the idea of the sample portfolios is to get you thinking about asset classes, and then you should be free to go and look and find other funds that are similar to those, either because they have smaller expense ratios or they're within the family of funds. If you're a vanguard and you just want to use vanguard funds, or you may have some other reasons. What I'm saying there is, yeah, go ahead and use other funds. Just be aware of their parameters and how they might affect your portfolio and your tax situation. That would be great. Okay. All right, we got time for one more today. And this one is from Brian P. A different Brian. And Brian P writes, hi Frank, I'm listening to your back catalog, currently episode 44. And I was wondering if you discussed the role of tips in a portfolio. Perhaps I missed it. Portfolio Charts doesn't have the ability to model tips into a portfolio, so it left me wondering what portfolios with and without tips will do. I did talk about this in response to a question if you go back to episode number 78, which you may not have gotten to yet, but I've talked about it there and in a couple other ones. One thing you can do if you're looking for particular topics is go to the portfolios page at the website and you can search the podcasts and we'll search the podcast and the show notes and we'll often pick up things like this so that you can quickly find or determine whether I've talked about something or not, and which episodes it may be in. I should say the other episodes where I discussed them was in the context of talking about the ETF iVOL, which is actually mostly tips, and those are episodes 70 and 72, if you want to go back and listen to those. But as to your question, I have not found tips to be very useful, and I've had bad experiences with tips in the past. that have made me feel like they just don't do or do not perform as advertised. And what I mean by that is if you check out, for instance, how tips are performed in the most recent environment of reflation or inflation, whatever you want to call it, they really just haven't done a whole lot and they act more like ballast in a portfolio and drag a portfolio down. than they do dealing with any measure of inflation. And that's kind of been their MO since they came into existence back in the 1990s. They were designed for inflationary environments, but they really do not respond very well, at least to the kind of inflationary environments we had. Maybe if they were back in the 1970s, there might be something different. The other thing I don't like about them is that they're positively correlated with stocks. And so back in 2008, when I was just learning how to construct portfolios, I had read a book saying, well, you should hold a lot of tips in your portfolio. And I was very dismayed when I saw those tips go down 10% during 2008. That wasn't why I was holding them. I thought that they should be neutral or up in a down market like that. What I learned is that those are the wrong things to hold. You need to be holding Long-term treasury bonds that will go up in those kinds of circumstances, like 2000, like 2008, like 2020. In all of those circumstances or instances, the TIPS also went down at the same time with the stock market. So you're not getting any diversification, you're not getting much in the way of return, you're just not getting much of anything out of TIPS at all. I don't think it means what you think it means. Which is why I have not seen a good use for them in a risk parity style portfolio. If you had a very bond heavy portfolio, perhaps that would make sense. If your portfolio was only 20 or 30% stocks, you might find a place to put tips in. You probably be better off using that ETF iVol, because that is an attempt to add some more oomph to tips and actually make them do something that fund is 85% tips. and 15% other things. I think I commented on that fund that it would have been better off with even more of its more speculative components to it because the tips in that fund just tend to drag it down and make it less interesting. Forget about it. So I would have to say that tips are just a drag. Forget about it. And not even a drag race.

Mostly Voices [23:56]

Sunday, Sunday, Sunday! As they shake hands with the devil, when they scream through the burning gates of hell, we'll sell you the whole seat, but you'll only need the edge! Be there! And now for something completely different.

Mostly Uncle Frank [24:11]

All right, it is now time for our portfolio reviews of the six sample portfolios that you can find at www.riskparityradio.com. And we'll just take a look at the markets themselves this week. And looking at those before we get to the portfolios, the S&P was up 0.61%, NASDAQ was up 0.48%, gold was down 0.28%. Long-term treasuries represented by TLT were up 1% last week. REITs represented by the fund REET were up 2.36%. Commodities represented by the fund PBDC were up 2.94%. as the big winner last week, and Preferred Shares Fund PFF was flat. So what you saw here is often typical of time periods where the stock market really isn't doing much of anything like it has been for the past month or so. These portfolios can still advance based on their other holdings in them, and that's what we've seen kind of this week. In our most conservative portfolio, the All Seasons, this one's only 30% stocks, 55% treasury bond funds, 7.5% gold and 7.5% commodities. It benefited from those commodities. It was up 0.8% for the week, which is a pretty substantial move for this portfolio because it's so conservative and it is up 6.8% since inception last July. Moving to our next portfolio and the next three are kind of our standard bread and butter sample portfolios here. This one's the Golden Butterfly. It has 40% in stocks divided into a total stock market fund and a small cap value fund. Then it's got 40% in bonds divided into long-term treasuries and short-term treasuries and 20% in gold and GLDM. This one was up 0.62% for the week. It was actually up less than the other portfolios, but it is still the portfolio leader in the horse race. It is up 21.48% since inception last July, so it is easily covering its 5% withdrawal rate and more. Moving to the next portfolio, the Golden Ratio. This one's 42% in stocks, 26% in long-term treasuries, 16% in gold, 10% in REITs, and 6% in a money market cash fund. And it was up 0.83% for the week. It is up 19.23% since inception last July and is also making those nice small advances that we like to see. I always like to call these the Bernie Madoff like returns because Bernie Madoff conned people into buying something on the promise that it would basically return about 1% a month. And it's interesting how often these portfolios conform to that sort of thing. with their lower volatilities. Expect the unexpected. So the Risk Parity Ultimate is 40% in stock funds, 25% in bond funds, then it's got 10% in REITs, 10% in gold, 12.5% in preferred shares, and 2.5% in VXX, which is actually way down to 0.3%. It not only has declined 74% since last year, it's also had a reverse split, which caused to throw out some cash, so it's getting really small of what's left of it, and we'll be rebalancing it in July anyway. So this was up 0.91% for the week. It is up 17.8% since inception last July. And now we move to our two experimental portfolios.

Mostly Voices [28:00]

Who came up with these? Tony Stark was able to build this in a cave. With a box of scraps. The first one is the Accelerated Permanent Portfolio.

Mostly Uncle Frank [28:08]

This one is 27%, 27.5% in TMF, a leveraged bond fund, 25% in UPRO, a leveraged stock fund, 25% in PFF, the preferred shares fund, and 22.5% in gold, GLDM. And it was up 1.13% for the week. It is up 15.36% since inception last July. And finally, our most volatile portfolio, the aggressive 5050 has also got the biggest pop this week. This one is 33% in the Leveraged Stock Fund UPRO, 33% in TMF the Leveraged Bond Fund, then 17% each in PFF and VGIT, an intermediate treasury bond fund. It was up 1.76% for the week. It is up 17.37 since inception last July. 17.37% I should say. Actually, it's a buck and a quarter, quarter staff, but I'm not telling him that. And then one other thing you might want to check out, if you haven't checked it out, if you go to the portfolios page, right near the top of it, there are the monthly summaries where we take all of the months that these portfolios have been in existence and just lay out what the percentage gain or loss was for those months. And you can get a good sense looking at this what it's like to hold these kinds of portfolios. And you can see how dampened they are compared to the three comparison mutual funds we've got there, which are VTSAX, a total stock market, VWENX, a 60/40 kind of portfolio, and VWIAx, which is like a 3565 portfolio. And you can see how the base risk parity style portfolios really have muted moves and they're usually small, usually 1 or 2% in either direction. And so it makes it a very pleasant thing to hold when things are going a little bit crazy in the markets. Ain't nothing wrong with that. But now I see our signal is beginning to fade. Shut it up, you. We have crossed 70,000 downloads for this podcast just this past week and I'm very grateful for all of our listeners. If you have comments or questions for me, please 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 message into the contact form there and I'll get it that way. Coming up this week, I think we'll be doing our monthly rant. I want you to be nice until it's time to not be nice. I found a good thing to rant about. One of my favorite whipping boys, annuity sales people.

Mostly Voices [31:06]

You know, whenever I see an opportunity now, I charge it like a bull. Ned, the bull, that's me now. Do you have life insurance, Phil? Because if you do, you could always use a little more, right? I mean, who couldn't? But you'll probably be hearing that later this week.

Mostly Uncle Frank [31:21]

I've got a busy week planned of moving a child out of the house to his apartment to start his first job after college.

Mostly Voices [31:29]

Yeah, baby, yeah!

Mostly Uncle Frank [31:33]

Calling this Emancipation Week.

Mostly Voices [31:37]

Do I feel lucky? Do I feel lucky?

Mostly Uncle Frank [31:41]

If you have not done so already, I would appreciate it if you went to Apple Podcast or you get this podcast and leave it a five-star review and a nice comment because that helps to get the word out. That would be great. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Mary [32:01]

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.