In this episode we answer emails from Ron, Iain, an Anonymous Visitor and Mr. Data. We discuss Ron's generosity and his variable or guardrails withdrawal strategy, some helpful British website references, what we use bonds for in these portfolio and how the TSP G fund fits into that, and small cap growth vs. small cap value stocks. And some notes on recent market turmoil.
And THEN we our go through our weekly and monthly portfolio reviews of the eight sample portfolios you can find at Portfolios | Risk Parity Radio.
Additional links:
Father McKenna Center Donation Page: Donate - Father McKenna Center
Portfolio Charts Retirement Spending: Retirement Spending – Portfolio Charts
Monevator Quilt Chart: Asset allocation quilt – the winners and losers of the last 10 years - Monevator
Just ETF (UK) Page: ETF portfolios made simple
Shannon's Demon Article: Unexpected Returns: Shannon's Demon & the Rebalancing Bonus – Portfolio Charts
Amusing Unedited AI-Bot Summary:
Market crashes reveal the true value of diversification. While Professor Jeremy Siegel called last week's events "the worst policy mistake in US economic history in the last 95 years," properly structured portfolios weathered the storm remarkably well.
The recent market plunge shows exactly why risk parity strategies work—the S&P 500 dropped 13.3%, NASDAQ fell 17.2%, but our All Seasons portfolio remained flat for the year. This divergence creates powerful rebalancing opportunities that can enhance long-term returns.
Looking at performance across asset classes reveals a classic recession pattern: falling stocks, rising treasury bonds, and initial panic selling followed by differentiated recoveries. Long-term Treasury bonds (VGLT) are up 7.2% for the year, demonstrating their crucial diversification role during market stress. Gold, despite some wobbles, remains up 15.7% year-to-date.
The mathematical principle behind this outperformance is what Claude Shannon described as "Shannon's Demon"—when assets perform differently at different times, periodic rebalancing allows the portfolio to outperform any individual component. This explains why we maintain exposure to both growth and value styles, rather than trying to predict which will outperform next.
For DIY investors, this market correction offers valuable lessons about portfolio construction. Understanding why you hold each asset—whether for stability, income, or diversification—is far more important than chasing yields. The Golden Butterfly portfolio, with its balanced approach across stocks, bonds, and gold, is only down 1.78% year-to-date while continuing to provide consistent distributions.
Want to learn more about building resilient portfolios? Visit riskparityradio.com for sample portfolios and detailed resources, or email your questions to frank@riskparityradio.com.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Voices (00:01):
A foolish consistency is the hobgoblin of little minds,
adored by little statesmen andphilosophers and divines.
If a man does not keep pacewith his companions, perhaps it
is because he hears a differentdrummer, a different drummer.
Mary and Voices (00:19):
And now, coming to you from dead center on your
dial, welcome to Risk ParityRadio, where we explore
alternatives and assetallocations for the
do-it-yourself investor,Broadcasting to you now from the
comfort of his easy chair.
Here is your host, FrankVasquez.
Mostly Uncle Frank (00:37):
Thank you, Mary, and welcome to Risk Parity
Radio.
If you have just stumbled inhere, you will find that this
podcast is kind of like a divebar of personal finance and
do-it-yourself investing Expectthe unexpected.
There are basically two kindsof people that like to hang out
(00:57):
in this little dive bar.
Voices (00:59):
You see, in this world there's two kinds of people.
Mostly Uncle Frank (01:02):
my friend, the smaller group are those who
actually think the host is funny, regardless of the content of
the podcast.
Funny how?
How am I funny?
These include friends andfamily and a number of people
named abby abby, someone abbywho Abby normal.
(01:25):
Abby normal.
The larger group includes anumber of highly successful
do-it-yourself investors, manyof whom have accumulated
multi-million dollar portfoliosover a period of years.
The best, jerry, the best andthey are here to share
(01:52):
information and to gatherinformation to help them
continue managing theirportfolios as they go forward,
particularly as they get totheir distribution or
decumulation phases of theirfinancial life.
Voices (02:03):
What we do is, if we need that extra push over the
cliff, you know what we do Putit up to 11.
11, exactly.
Mostly Uncle Frank (02:11):
But whomever you are, you are welcome here.
I have a feeling we're not inKansas anymore.
But now onward, episode 412.
Today on Risk Parity Radio it'stime for our weekly portfolio
reviews of the eight sampleportfolios you can find at
wwwriskparityradiocom on theportfolios page, and we can also
(02:35):
talk about April distributions.
Just a little preview of that.
Mary and Voices (02:39):
And it's gone.
Poof, uh, what it's gone, it'sall gone.
What's all gone.
The money in your account, itdidn't do too well, it's gone.
Mostly Uncle Frank (02:52):
Well, it wasn't quite that bad for us,
but it was bad and this was asingularly bad week.
I think Professor Jeremy Siegelfrom Wharton said that this was
the worst policy mistake in USeconomic history in the last 95
years.
I think he was referring to theSmoot-Hawley tariffs as the
(03:12):
prior record holder.
Voices (03:15):
In 1930, the Republican-controlled House of
Representatives, in an effort toalleviate the effects of the
anyone, anyone, the GreatDepression, passed the anyone,
anyone a tariff bill, theHawley-Smoot Tariff Act, which
(03:36):
anyone raised or lowered raisedtariffs in an effort to collect
more revenue for the federalgovernment.
Did it work?
Anyone, anyone know the effects?
It did not work and the UnitedStates sank deeper into the
Great Depression.
Mostly Uncle Frank (03:53):
And stocks managed to drop 10% in two days,
which I think is also some kindof a record Not one we really
want to see any more of.
But what can you say about allof this?
Voices (04:08):
Okay, turn it on.
Mostly Uncle Frank (04:22):
It's a piece of crap, it doesn't work well,
I could have told you that, butlet's put all that on hold for
the moment and instead attend tosome of your emails.
Voices (04:39):
And so, without further ado, here I go once again with
the email.
Mostly Uncle Frank (04:43):
And First off, first off, an email from
Ron.
Mary and Voices (04:49):
Joining me now is the man responsible for
Popeil's pocket fisherman, theVegematic, the smokeless ashtray
and that spray paint forbalding men.
(05:16):
Please welcome folks, ronPopeil.
And Ron writes.
Portfolio is 100% equities,broken into 60% total market,
30% international and 10% smallcap.
Annual distribution of 8%.
So 2% per quarter.
Quarterly distributions at thebeginning of each calendar
quarter based on the balance atthe end of the previous quarter.
(05:36):
So in this case it will bebased on the balance at close on
3-31-25.
Annual rebalance in earlyJanuary, since that's when I
rebalanced to the current mix.
2025 quarter one distributionBalance on $1231.24, $5,223.
Balance on $331.25, $5,113.
(06:00):
2025 quarter one distribution$102.
Grants can only be in wholedollars.
2025 quarter one distribution$102.
Grants can only be in wholedollars.
2025 quarter one return minus2.1% gross before distribution,
minus 4% net after distribution.
Well, we're off to a roughstart, but we're off while I
have you.
I wanted to know if you had anycomments on my personal
(06:21):
withdrawal strategy.
I'm retired in my early 50s andI'm using a strategy I base
loosely off the one you used forthe leveraged sample portfolios
.
I took my starting balance atretirement let's say $10,000 for
an example, and set a target of4.5% If the balance goes down
by 10% of the starting point, so$9,000, I reduce my rate by 25
(06:45):
basis points to 4.25%, and so ondown for each 10% decrease to a
minimum of 3.5%.
However, if it goes up by 10%so $11,000, I ratchet up by 25
basis to 4.75, up to a max of5.0 if it goes to 20% up.
My portfolio is roughly 55%,40% US, 15% international
(07:11):
equities, 26% bonds, 12% privatealternative, 7% gold.
The only thing that I wonderabout is that my starting point
of $10,000 is fixed, so in 20years it won't account for
inflation.
But do I care Thoughts?
Thanks, ron.
Voices (07:30):
If you followed all the instructional material, you just
said it and forget it.
Mostly Uncle Frank (07:37):
Well, first off, Ron, thank you for all your
good work with the McKenna manportfolio.
Voices (07:42):
Yes.
Mostly Uncle Frank (07:44):
As most of you know, here we do not have
any sponsors on this program,but we do have a charity we
support.
It's called the Father McKennaCenter, and it supports hungry
and homeless people inWashington DC.
Ron has gotten creative withsupporting the Father McKenna
Center and has come up with aportfolio out of which he is
distributing money on a periodicbasis to the center, and so
(08:08):
whenever he writes in about it,it's going to be the first email
.
How about that?
Voices (08:13):
Surely you can't be serious.
I am serious, and don't call meShirley.
Mostly Uncle Frank (08:18):
The reason it's called the McKenna man
Portfolio is because a McKennaman is somebody that we refer to
, who has come through thecenter as a homeless person and
has been able to reclaim theirlife with the help of the center
and our executive director.
Our current executive director,dennis, is a McKenna man
(08:38):
himself.
We both attended Georgetown LawSchool around 1990 and went off
into legal careers, and heworked for law firms and some
investment banks, but at acertain point he had a problem
with alcohol and lost it all andended up on the street.
But over the past 10 to 15years he came through the center
(08:59):
and has been able to reclaimhis life and now works in social
services, and so we brought himon as the new executive
director in January of 2024.
And he is someone I very muchenjoy working with in my role as
treasurer and head of thefinance committee.
But if you do give to thecenter, either the way that Ron
(09:20):
has done or the more traditionalway, you can go to the Father
McKenna website and go to thedonation page and just give
there, or you can go to oursupport page at
wwwriskprioritywaycom and becomeone of our patrons on Patreon.
By the way, if you give to thecenter and tell me in your email
, I will move your email to thefront of the line, and so thank
(09:46):
you once again for your support,ron.
But now let's get to yourquestions.
What you are talking about withyour withdrawal strategy is
basically what is known as aguard rails kind of strategy.
The most popular ones of thoseare the Geithen-Klinger strategy
or what is called the KitsisRatchet.
These are described in thenotes for the retirement
(10:09):
spending chart at PortfolioCharts, which also allows you to
model these kind of variablespending scenarios, and I would
suggest you take your parametershere and go over there and
check them out.
What you will find generally isthat these kind of strategies
do tend to increase flexibilityand your ability to spend money
(10:34):
overall, even though there is avariable aspect to them involved
, or I should say, becausethere's a variable aspect to
them involved that you'rewilling to spend less money in
certain years and not just moremoney every year.
Morningstar has run these kindsof strategies in their sort of
annual state of retirementreport and found that they do
(10:56):
tend to add one percent or moreto a base safe withdrawal rate
when implemented.
So they certainly are a goodidea if you can deal with the
complexity of them a relativecomplexity of them.
Now, as to inflation, we'vetalked about that at length in
episode 336 and also morerecently in episode 403.
(11:19):
But if you are going toestimate inflation for
retirement, you should startwith the base rate for it, and
there have been a number ofstudies run that basically show
that a retiree, or reallyanybody that is over about 50,
experiences inflation at lessthan the CPI usually 1% to 2%
less than the CPI.
(11:39):
And when Morningstar has runthat kind of base rate in their
calculations, they have foundthat it effectively increases
the safe withdrawal rate bybetween 0.5% and 1%.
Basically, what's going onthere for most people is that
the only thing that they havethat is inflating at greater
than the CPI is typically healthcare, and everything else on
(12:02):
that CPI smorgasbord list ofexpenses tends to inflate at
less than that.
Our own experience over thepast five years is our spending
has been relatively flat overalland certainly down since all of
our children are out of collegenow.
So really I think the best wayto assess this is to look at
your own numbers over the courseof years and see whether they
(12:26):
are actually inflating or not,because personal inflation is
more personal than just aboutanything else in personal
finance and bears littleresemblance to public figures
like the CPI, because you haveto remember that the CPI figures
include people who are justspendthrifts and don't keep
track of their money, but alsoincludes people in the first
(12:49):
half of life who are engaging inhousehold formation and having
children and naturally spendingmore money because they have
more mouths to feed, if you will.
So it makes sense that thataverage is actually going to be
more than what retirees arelikely to experience and what
you should start with as a baserate.
(13:09):
If you haven't calculated yourown personal inflation rate and
this is actually one of the keyways that people misuse
retirement calculators Insteadof using base rates, which is
the core principle of goodforecasting and good decision
making, they do things that arecognitively biased, and the
(13:30):
cognitive bias here is actuallycalled the possibility effect.
It's what if this happens?
Or what if that happens,without any reference to whether
something is likely to happen,equating mere possibility with
likelihood or substantialprobability.
If you do that, you're justgoing to be making bad
forecasting decisions.
This is straight from Kahnemanand Tversky.
(13:50):
In order to make good forecasts, you need to start with base
rates in whatever you'reforecasting, whether it's your
retirement, inflation, running abusiness, completing a project
on time, whatever it is.
Voices (14:03):
I'm asking you to do that.
But what's easy to do is whatEasy not to do.
Mostly Uncle Frank (14:15):
And if you're not doing that, you are
just doing it wrong.
Forget about it.
So you may want to go back toyour never retirement calculator
and fix that problem, if thatis a problem for you.
Anyway, thank you again foryour support, ron and the
wonderful McKenna man portfolio,and thank you for your email.
Voices (14:31):
You follow all instructions and you Set it and
forget it, set it and forget it,set it and forget it.
It's as simple as that, folks.
Second off Second off.
Mostly Uncle Frank (14:47):
Second off we have an email from Ian.
Mary and Voices (14:50):
In your preparation for your
examinations.
If you don't do your revisionproperly, do you know what will
happen?
Mostly Uncle Frank (15:05):
You shall not pass.
And Ian writes.
Mary and Voices (15:10):
Hi Frank, I hope you are well.
I continue to be bothentertained and amused by your
regular podcasts.
I make you laugh.
I'm here to fucking amuse you.
What do you mean?
Funny?
Funny, how?
How am I funny?
You were kind enough to replyto my email in episode 386.
For the benefit of your Britishlisteners, you referenced UK
content providers, pensioncraft,who I agree are good.
(15:33):
I include a link here for arecent post from another UK blog
called Moneyvator.
They did a recent post on AssetAllocation Quilt the winners
and losers of the last 10 years.
I'm sending this as I thoughtyou might be interested.
It seems right up your street.
The guys at Moneyvator seempretty clued up, but putting
this to you as a tribute, as youare the capo de copy of Risk
(15:55):
Parity After All.
Voices (15:57):
Yeah, baby, yeah.
Mary and Voices (15:59):
You may or may not find this interesting, but
we listeners would be interestedin your thoughts and it might
lead to some interestingdiscussion.
Keep up the good work andthanks for all you do.
All the best, ian.
Mostly Uncle Frank (16:11):
Well, thanks for sharing that reference, ian
.
I'm always kind of at a losswhen people from outside the
United States ask me forresources because I'm really not
up on them.
But I note that a lot of ourBritish listeners seem to be
more up on it than I am, and I'mglad when you share these
things with us.
So that quilt chart looked veryinteresting, I noted.
(16:35):
I think gold was the third bestperformer over the past 10
years, at least in pounds, and Ithink that that's generally
true for a lot of currenciesthat are not the US dollar.
For the few of you who don'tknow what a quilt chart is, it
basically looks at a group ofassets and then ranks them by
(16:55):
performance for a series ofyears.
Usually you'll see a 10-yearquilt chart with 10 assets in it
, but you can see over time howdifferent assets rise to the top
or fall to the bottom.
Now I had seen in the pastcouple of months another site
with a whole bunch of differentquilt charts that ranked various
(17:16):
different assets and differenttime frames, including one that
was a quilt chart by decades.
I haven't been able to refinethat.
I will link to it.
If I ever do again.
I'm sure I will run into it atsome point.
I also noted that there was alink on this Munivator site to
something called Just ETF, whichis also British-based and talks
(17:38):
all about ETFs.
I will link to that in the shownotes as well.
That looked like a very usefulsite for people looking for
particular ETFs that doparticular things or just
explaining the concept of themto people outside the US.
So I'll put these links in theshow notes so people can check
them out, and thank you for youremail.
Voices (18:01):
You shall not pass.
Mostly Uncle Frank (18:10):
Next off, we have an email from the
mysterious visitor number 7314,who did not provide a name.
Voices (18:21):
I have no name.
Well, that right there may bethe reason you've had difficulty
finding gainful employment.
Mostly Uncle Frank (18:27):
And our anonymous visitor writes.
Mary and Voices (18:30):
I see that most of your portfolios suggest
using long and short-termtreasuries.
I have access to the G Fund,also known as the Government
Securities Investment Fund,which pays investors the higher
yield that comes fromlonger-term US government bonds,
but does so without the risk oftheir day-to-day market price
fluctuations.
Is this a good option forreplacing long and short-term
(18:53):
treasury bonds?
Mostly Uncle Frank (18:57):
Yes, the G fund in the TSP lineup is a good
short-term bond fund and so, tothe extent you would need an
allocation to short-term USgovernment bonds, you can
certainly use the G fund.
However, you would not use thatas a substitute for long-term
bonds, because it's doingsomething different.
(19:18):
If you want to listen, listento Bond episodes, go back and
listen to episodes 14, 16, 64,and 69.
And what you will learn in anutshell is that you can
essentially use bonds for threethings.
One is stability, as in theydon't go up or down very much
(19:39):
and pay something.
Another one is income, whereyou actually are trying to get a
high income out of the bond.
And the third one isdiversification, where you are
trying to select bonds that arethe most diversified from the
other assets in your portfolio.
Now, we do not use bonds forincome in these kind of
(19:59):
portfolios.
We're only looking at bonds forstability and diversification.
If you were using bonds forincome, you might actually pick
something like a preferredshares fund instead of the bond
fund, because it pays at a highrate and it also pays a
qualified dividend.
But the reason we primarily donot look to bonds for income is
(20:21):
that what we are interested inwith respect to the returns of
assets is their total return,not what income they pay off,
good, because we live in an eraof no-fee trading.
So you would actually preferyour asset to not pay income and
just keep the money in theasset, retain it, which would
(20:44):
make the price go up, and thenbe able to sell it periodically
and only pay the taxes when yousell it.
So having income coming out ofan asset is not an advantage.
In fact it's a disadvantage inmany cases, because the first
word that comes after income istaxes.
Mary and Voices (21:00):
That's not an improvement.
Mostly Uncle Frank (21:03):
So, as a proposition, we know that bonds
are not going to have totalreturns that are going to exceed
stocks, so we are not holdingbonds ever for their return
profile or their income.
We are only going to hold themfor stability or diversification
, in which case the amount ofincome they're paying is not
(21:25):
their key factor.
The key factor when you'retalking about stability and
diversification is the durationor length of the bonds at issue.
If you have short durationbonds or things like T-bills,
those are very stable, but theydon't offer a whole lot of
diversification.
They're basically inert.
(21:45):
They don't go up, they don't godown, regardless of what other
assets do.
If you want diversification outof bonds, you typically have to
go out on the duration spectrumand look at only the highest
quality bonds, which are USTreasury bonds, and those happen
to be the bonds that are themost diversified from stocks,
whether those be US stocks orforeign stocks.
(22:06):
And we're actually seeing thatplay out this week, with bonds
being one of the things.
Particularly long-term bondsincreased in value last week
while stocks were falling invalue, which is going to create
some rebalancing opportunitiesin the near future.
So whenever you're thinkingabout holding bonds, you first
need to know why you are holdingthem, and I suggest it's
(22:29):
certainly not for their returnprofile, because if you wanted a
higher return profile, you'dhold stocks or something else.
You would not hold bonds.
And then the next question iswhat purpose are they serving in
your portfolio?
Is it for more for stability,or is it more for
diversification?
And you would select the bondsthat fulfill that role the best.
(22:50):
If you wanted both things, youwould select two funds one that
does the stability thing, ashort-term bond fund, and one
that does the diversificationthing, a long-term bond fund.
But those are two differentanimals that do two different
things, so you never want toconfuse them or think you can
substitute one for the other,because it doesn't work that way
.
Forget about it.
(23:12):
For those of you who want tohear more about that, I would
suggest you go back and listento those old episodes, because
this is something that I findamateur investors are very
confused about and get fixatedon the interest rate paid and
not on the purpose of having thebonds in the first place.
Voices (23:30):
That's the fact, jack.
That's the fact.
Mostly Uncle Frank (23:33):
Jack and so amateurs repeatedly pick the
wrong bonds for what they thinkthe bonds are doing, and in many
worst case scenarios theyactually pick bonds that are
highly correlated with theirstocks but don't yield as much,
so it's a completely pointlessexercise.
Voices (23:50):
Hopefully that helps and thank you for your email you
don't tell your papi how to cutthe electorate.
We ain't one at a time in herewe're mass communicating.
Mary and Voices (24:01):
Oh yes, that's a powerful new force take a leg
junior.
Mostly Uncle Frank (24:07):
Last off.
Last off of an email from MrData.
I am not less perfect than Lore, and Mr Data writes Hi, frank,
you often speak of Mr Merriman.
Mary and Voices (24:21):
I took it upon myself to learn about his
portfolios and ideas.
Merriman, I took it upon myselfto learn about his portfolios
and ideas.
I found that he's a fan ofsmall cap growth funds and
several of his portfoliosrecommend them.
I also heard in severalepisodes that you don't
recommend them.
I'd like your opinion and whyyou two differ on this asset
class specifically.
Thanks, mr Data.
Feel free to play some StarTrek the Next Generation, mr
(24:44):
Data.
Sound clips.
Voices (24:47):
I am not less perfect than Lore.
I am not less perfect than LoreEnough.
Both of you sit down.
Mostly Uncle Frank (24:57):
Well, it appears that Mr Data has a
problem with his programmingchips these days programming
chips these days.
Mary and Voices (25:09):
Data intoxication is a human
condition.
Your brain is different.
Voices (25:11):
It's not the same, as we are more alike than unlike, my
dear captain because paulmerriman is not a fan of small
cap growth funds that's not howit works.
Mary and Voices (25:23):
That's not how any of this works.
Mostly Uncle Frank (25:25):
He's a fan of small cap value funds, which
are much different than smallcap growth funds, and, in fact,
if you listen to him, he willsay that small cap growth is
probably the factor combinationthat you want to avoid.
Mary and Voices (25:39):
You fell victim to one of the classic blunders.
Mostly Uncle Frank (25:42):
And not include in your portfolio
because it has an inferior riskreward profile.
It's a lot of risk, but notthat much more reward than you
would find from the stock marketgenerally.
So if you want my opinion onwhy we differ on this asset
specifically, the answer is wedo not differ on this asset
(26:03):
class specifically.
I'm telling you, fellas, you'regoing to want that cowbell, I
will say I am a bit lesssanguine on whether small cap
value is likely to outperformthe stock market generally or in
the future, because the mainreason that we are interested in
(26:40):
small cap value and valuestocks as a category here is
because they are diversifiedfrom growth stocks.
In 2022, you would see a verydisparate performance between
growth stocks and value stocks.
Voices (26:55):
Data.
You are fully functional,aren't you, of course?
But how fully?
In every way, of course.
Mostly Uncle Frank (27:02):
I am programmed in multiple
techniques, a broad variety ofpleasuring, which would then
allow you to rebalance out ofthe better performer into the
lower performer.
So in 2022, your value stocksmay have been down 10% to up 10%
, whereas your growth stockswere probably down over 30%.
(27:25):
That huge difference inperformance would have let you
rebalance out of the valuestocks into the growth stocks
and then experience greatergrowth and performance when the
growth stocks recovered the nextyear.
Voices (27:40):
You, jewel, that's exactly what I hoped.
You, jewel, that's exactly whatI hoped.
Mostly Uncle Frank (27:46):
This is a mathematical idea called
Shannon's Demon, which is whydiversification works, or why
you get a better performance outof two similar assets that
perform differently at differenttimes than you would out of
either one of them alone.
And that is the fundamentalreason why, in these risk parity
(28:07):
style portfolios, we want tohave half of our stocks in
growth or growth leaning and theother half in value or value
leaning, because it's going tobe more diversified and allowed
for these rebalancings over time, which will make that
combination perform better thaneither one of them alone, and so
(28:27):
we don't need to worry aboutwhether one is outperforming the
other one.
All we really care about is thefact that they are both
performing and performingdifferently at different times.
So hopefully a little bit ofthat reprogramming helps you, mr
Data.
Ah, good Data.
Voices (28:44):
At least you're functioning fully, captain, if
you prick me, do I not leak?
Mostly Uncle Frank (28:56):
And thank you for your email.
Mary and Voices (28:59):
And now for something completely different.
Voices (29:03):
What is that?
What is that?
What is it?
Mostly Uncle Frank (29:21):
Oh no, not the bees.
The bees certainly descended onstock markets last week.
As we mentioned in the opening,this was one of the worst
two-day performances ever forthe stock market and one of the
oddest reasons for that, whichis a policy error by the US
government, and so, as aconsequence, what markets are
flashing these days is recession, essentially.
So what I find actuallyinteresting is that, although
(29:44):
the cause of the impendingrecession here is kind of unique
, the way the markets arebehaving is very typical for
markets that are going into arecessionary period.
What I mean by that is, thestock markets are falling
steeply.
Meanwhile, the US Treasury bondsare rising as people buy more
(30:05):
of those bonds, in particular,on the long end.
You'll see that that has goneup several percent this week,
and you also just saw somegeneral selling, or panic
selling, of all risk assets,including gold gold.
(30:29):
But if this plays out like theearly 2000s or like the 2008
period, what you are likely tosee, after all of the selling is
done, or mostly done, is thatthings like gold will recover
more quickly, and also it islikely that people will buy more
value stocks, whereas growthstocks will remain down for
longer.
At least, that is the generalpattern of recessions and is
fundamentally why we're holdingportfolios like this.
(30:51):
Because this pattern repeatsover and over again.
You just don't know when it'sgoing to come upon you.
Mary and Voices (30:58):
A crystal ball can help you, it can guide you.
Mostly Uncle Frank (31:03):
But as a consequence, these kind of risk
parity portfolios just aren'thurting very much compared to
the overall markets because theyhave more diversification and
they will have rebalancingopportunities coming up in the
future.
But just looking at the marketsfor the year so far, the S&P
500, represented by VOO, is down13.3% for the year.
(31:27):
The NASDAQ, represented by QQQ,is down 17.2% for the year.
I think the overall NASDAQmarket is actually in bear
market category and is down over20%.
Small cap value, represented bythe fund VIOV, is down 18.78%
for the year.
Gold is still up substantially,although it lost a couple of
(31:49):
percent last week.
Mary and Voices (31:51):
I love gold.
Mostly Uncle Frank (31:54):
A representative fund, gldm, is up
15.7% for the year this was theweek of long-term treasury
bonds and a representative fund,vglt, is now up 7.2 percent for
the year.
So it has returned to havingthat negative correlation with
(32:19):
the stock market, which is whathappens during recessions and
has happened in every recessionsince at least the 1950s.
Reits, represented by the fundREET, are now down 5.14% for the
year not nearly as bad as therest of the stock market.
Commodities, represented by thefund PDBC are down 2.31% for
(32:40):
the year.
Preferred shares, representedby the fund PFFV, are down 1.68%
for the year and managedfutures managed to be down.
Represented fund DBMF was down4.92% for the year.
So again, this was kind oftypical recession era behavior
last week Panic, selling in allrisk assets and buying of bonds,
(33:02):
excelling in all risk assetsand buying of bonds.
The one thing that actually wasmore unusual is that the US
dollar also fell last week, andusually in a recessionary
environment the US dollar isrising.
But I think that that isrelated to the particular cause
of this recessionary impulse,which is going to favor
(33:24):
investments in foreign assetsover US assets, even though
everybody's going to be hurting.
So don't think that you'regoing to escape the downturn in
global stock markets byinvesting in a particular
country.
It's just going to be the casethat some are going to be worse
than others, and the US seems tobe leading the way down, at
(33:45):
least right now.
Moving to these portfolios, thefirst one's the All Seasons.
This is a reference portfolio.
It's only 30% in stocks and atotal stock market fund, 55% in
intermediate and long-termtreasury bonds and the remaining
15% divided into gold andcommodities.
It is down 2.57% for April.
(34:06):
So far, four days of April, itis actually flat for the year 0%
year-to-date and it's up 8.56%since inception in July 2020.
For April, we are distributing$31 from cash that has
accumulated.
Let's say, at a 4% annualizedrate, that'll be $125
(34:28):
year-to-date and $1,815 sinceinception in July 2020.
All of these portfolios startedwith about $10,000 in them.
Moving to thesebread-and-butter kind of
portfolios, first one's a goldenbutterfly.
This one is 40% in stocksdivided into a total stock
market fund and a small capvalue fund, 40% in bonds divided
(34:50):
into long and short termtreasuries, one for stability
and one for diversificationGuess which one is which?
And 20% in gold GLDM.
It is down 3.86% month-to-datefor April.
It's down 1.78% year-to-dateand up 31.55% since inception in
(35:10):
July 2020.
So you're probably sleepingpretty well at night if you have
that one or something like it.
Voices (35:17):
Snooze and dream.
Dream and snooze.
The pleasures are unlimited.
Mostly Uncle Frank (35:22):
We'll be distributing $45 for April.
Treasures are unlimited.
We'll be distributing $45 forApril.
It's going to come out of GLDM,the gold fund, which has been
the best performer this year.
It's at a 5% annualized rate.
That'll be $182 year-to-dateand $2,483 since inception in
July 2020.
Next one's golden ratio.
This one is 42% in stocksdivided into a large cap growth
(35:46):
fund and a small cap value fund,26% in long-term treasury bonds
, 16% in gold, 10% in managedfutures and 6% in cash in a
money market fund.
It is down 4.21% for the monthof April.
So far.
It's down 4.24% year to dateand up 24.44% since inception in
(36:07):
July 2020.
We'll be taking $43 out of it,which always comes out of cash
in this portfolio.
That's for April at a 5%annualized rate.
That'll be $174 year-to-dateand $2,435 since inception in
July 2020.
Next one's the risk parityultimate.
It's kind of our kitchen sinkhere.
I'm not going to go through all14 of these funds.
(36:29):
I do note there's aninteresting one called BTAL,
which is a long short fund thatgoes long value and short growth
, and that one is up fairlysubstantially this year,
although it was down on Friday.
So this portfolio is down 4.89%month to date.
For April.
It's down 4.2% year to date andup 16.35% since inception in
(36:54):
July 2020.
For the month of April, we'rewithdrawing at a 5% annualized
rate That'll be $39 from thegold fund.
Gldm would be $158 year-to-dateand $2,608 since inception in
July 2020.
Now moving to theseexperimental portfolios
involving leveraged funds.
We do hideous experiments here,so you don't have to.
Voices (37:17):
Look away, I'm hitting you.
Mostly Uncle Frank (37:19):
First one's the Accelerated Permanent
Portfolio.
It is 27.5% in a levered bondfund TMF, 25% in a levered stock
fund UPRO, 25% in PFF, apreferred shares fund, and 22.5%
in gold GLDM.
It's down 4.74% month-to-date.
It's down 0.95% month-to-date.
(37:42):
It's down 0.95% year-to-dateand up 0.07% since inception in
July 2020.
This will almost certainly berebalanced on the 15th of this
month if current trends continue, since the stock fund is down
to 15% of the portfolio when itusually is at 25%.
(38:02):
But we shall see what happensbetween now and the 15th when we
actually look at this forrebalancing purposes.
So we'll be taking $38 out ofit from cash accumulated cash
for April.
It's a 6% annualized rate.
It's $156 year-to-date and$2,786 since inception in July
2020.
Next one's the aggressive 50-50.
(38:25):
This is the most levered andleast diversified of these
portfolios.
It's one-third in a leveredstock fund UPRO, one-third in a
levered bond fund TMF and theremaining third in Ballast,
comprised of a preferred sharesfund and an intermediate
treasury bond fund.
It is down 5.8% month to date.
It is down 7.25% year to dateand down 18.31% since inception
(38:48):
in July 2020.
It's very easily the worstperformer of all of these
portfolios, which is funnybecause it was the best
performer at one time, but thatis a consequence of all the
leverage and a lack ofdiversification.
For April, we'll be taking $32out of it from the Intermediate
Treasury Bond Fund, vgit.
It'll be at a 6% annualizedrate, $132 year-to-date and
(39:19):
$2,801 since inception, july2020.
Now moving to the next one.
This is the levered goldenratio portfolio.
It is 35% in a compositelevered fund called NTSX that is
the S&P 500 and treasury bondsin it, 20% in gold, gldm, 15% in
an international small capvalue fund, avdv.
Then it's got 10% in KMLM,which is a managed futures fund,
(39:41):
10% in a levered bond fund, tmf, and the remaining 10% divided
into UDOW and UTSL, which arelevered value funds.
Following the Dow and theUtilities Index, it is down
6.96% month-to-date.
It's down 4.7% year-to-datepercent month to date.
(40:05):
It's down 4.7 percent year todate and down 8.92 percent since
inception, july 2021.
It's a year younger than theother ones.
For April, we'll be taking $33out of it from accumulated cash.
It's at a 5 percent annualizedrate.
It'll be $134 year to date and$1,690 since inception, july
2021.
And the last one is the Optraportfolio.
This is a return stacked styleportfolio.
(40:27):
It is 16% in a leveraged stockfund, upro, 24% in a worldwide
value fund called AVGV, 24% inGOVZ, which is a US Treasury's
STRIPS fund, and the remaining36% divided into gold and
managed futures.
It is down 6.57% month to date.
(40:50):
It is down 5.61% year to dateand down 2.86% since inception
in July 2024.
It's only about nine months old.
For April, we are withdrawing$50 from GLDM.
That's at a 6% annualized rate.
It'll be $203 year-to-date and$463 since inception in July
(41:13):
2024.
And that concludes ourportfolio reviews for the week
and the month Boring and what wecan see from this, in
particular, with respect to thefirst three portfolios, which
are kind of basic ones that theyare performing, essentially,
how you would draw this up interms of a stock market crash
(41:38):
and the kind of expectedperformance you would see out of
the other assets, which, ifthis continues, is going to be
resulting in some substantialrebalancing when we get to
rebalancing those portfolios inJuly on their annual rebalancing
dates.
So we'll be selling a lot of thebonds and gold and other things
and buying more stocks at lowerlevels.
(41:58):
Buy low, sell high.
Fear that's the other guy'sproblem, but now I see our
signal is beginning to fade.
If you have comments orquestions for me.
Please send them tofrankatriskparityradarcom.
The email isfrankatriskparityradarcom.
Or you can go to the websitewwwriskparityradarcom.
Put your message into thecontact form and I'll get it
(42:22):
that way.
If you have any chance to do it, please go to your favorite
podcast provider and likesubscribe.
Give me some stars, a follow, areview that would be great.
Okay, thank you once again fortuning in.
Voices (42:56):
This is Frank Vasquez with Risk Party Radio signing
off.
Mary and Voices (43:10):
The Risk Parody Radio Show is hosted by Frank
Vasquez.
The content provided is forentertainment and informational
purposes only and does notconstitute financial, investment
tax or legal advice.
Please consult with your ownadvisors before taking any
actions based on any informationyou have heard here, making
sure to take into account yourown personal circumstances.
A foolish consistency is the hobgoblin of little minds,
adored by little statesmen andphilosophers and divines.
If a man does not keep pacewith his companions, perhaps it
is because he hears a differentdrummer, a different drummer.
Mary and Voices (00:19):
And now, coming to you from dead center on your
dial, welcome to Risk ParityRadio, where we explore
alternatives and assetallocations for the
do-it-yourself investor,Broadcasting to you now from the
comfort of his easy chair.
Here is your host, FrankVasquez.
Mostly Uncle Frank (00:37):
Thank you, Mary, and welcome to Risk Parity
Radio.
If you have just stumbled inhere, you will find that this
podcast is kind of like a divebar of personal finance and
do-it-yourself investing Expectthe unexpected.
There are basically two kindsof people that like to hang out
(00:57):
in this little dive bar.
Voices (00:59):
You see, in this world there's two kinds of people.
Mostly Uncle Frank (01:02):
my friend, the smaller group are those who
actually think the host is funny, regardless of the content of
the podcast.
Funny how?
How am I funny?
These include friends andfamily and a number of people
named abby abby, someone abbywho Abby normal.
(01:25):
Abby normal.
The larger group includes anumber of highly successful
do-it-yourself investors, manyof whom have accumulated
multi-million dollar portfoliosover a period of years.
The best, jerry, the best andthey are here to share
(01:52):
information and to gatherinformation to help them
continue managing theirportfolios as they go forward,
particularly as they get totheir distribution or
decumulation phases of theirfinancial life.
Voices (02:03):
What we do is, if we need that extra push over the
cliff, you know what we do Putit up to 11.
11, exactly.
Mostly Uncle Frank (02:11):
But whomever you are, you are welcome here.
I have a feeling we're not inKansas anymore.
But now onward, episode 412.
Today on Risk Parity Radio it'stime for our weekly portfolio
reviews of the eight sampleportfolios you can find at
wwwriskparityradiocom on theportfolios page, and we can also
(02:35):
talk about April distributions.
Just a little preview of that.
Mary and Voices (02:39):
And it's gone.
Poof, uh, what it's gone, it'sall gone.
What's all gone.
The money in your account, itdidn't do too well, it's gone.
Mostly Uncle Frank (02:52):
Well, it wasn't quite that bad for us,
but it was bad and this was asingularly bad week.
I think Professor Jeremy Siegelfrom Wharton said that this was
the worst policy mistake in USeconomic history in the last 95
years.
I think he was referring to theSmoot-Hawley tariffs as the
(03:12):
prior record holder.
Voices (03:15):
In 1930, the Republican-controlled House of
Representatives, in an effort toalleviate the effects of the
anyone, anyone, the GreatDepression, passed the anyone,
anyone a tariff bill, theHawley-Smoot Tariff Act, which
(03:36):
anyone raised or lowered raisedtariffs in an effort to collect
more revenue for the federalgovernment.
Did it work?
Anyone, anyone know the effects?
It did not work and the UnitedStates sank deeper into the
Great Depression.
Mostly Uncle Frank (03:53):
And stocks managed to drop 10% in two days,
which I think is also some kindof a record Not one we really
want to see any more of.
But what can you say about allof this?
Voices (04:08):
Okay, turn it on.
Mostly Uncle Frank (04:22):
It's a piece of crap, it doesn't work well,
I could have told you that, butlet's put all that on hold for
the moment and instead attend tosome of your emails.
Voices (04:39):
And so, without further ado, here I go once again with
the email.
Mostly Uncle Frank (04:43):
And First off, first off, an email from
Ron.
Mary and Voices (04:49):
Joining me now is the man responsible for
Popeil's pocket fisherman, theVegematic, the smokeless ashtray
and that spray paint forbalding men.
(05:16):
Please welcome folks, ronPopeil.
And Ron writes.
Portfolio is 100% equities,broken into 60% total market,
30% international and 10% smallcap.
Annual distribution of 8%.
So 2% per quarter.
Quarterly distributions at thebeginning of each calendar
quarter based on the balance atthe end of the previous quarter.
(05:36):
So in this case it will bebased on the balance at close on
3-31-25.
Annual rebalance in earlyJanuary, since that's when I
rebalanced to the current mix.
2025 quarter one distributionBalance on $1231.24, $5,223.
Balance on $331.25, $5,113.
(06:00):
2025 quarter one distribution$102.
Grants can only be in wholedollars.
2025 quarter one distribution$102.
Grants can only be in wholedollars.
2025 quarter one return minus2.1% gross before distribution,
minus 4% net after distribution.
Well, we're off to a roughstart, but we're off while I
have you.
I wanted to know if you had anycomments on my personal
(06:21):
withdrawal strategy.
I'm retired in my early 50s andI'm using a strategy I base
loosely off the one you used forthe leveraged sample portfolios
.
I took my starting balance atretirement let's say $10,000 for
an example, and set a target of4.5% If the balance goes down
by 10% of the starting point, so$9,000, I reduce my rate by 25
(06:45):
basis points to 4.25%, and so ondown for each 10% decrease to a
minimum of 3.5%.
However, if it goes up by 10%so $11,000, I ratchet up by 25
basis to 4.75, up to a max of5.0 if it goes to 20% up.
My portfolio is roughly 55%,40% US, 15% international
(07:11):
equities, 26% bonds, 12% privatealternative, 7% gold.
The only thing that I wonderabout is that my starting point
of $10,000 is fixed, so in 20years it won't account for
inflation.
But do I care Thoughts?
Thanks, ron.
Voices (07:30):
If you followed all the instructional material, you just
said it and forget it.
Mostly Uncle Frank (07:37):
Well, first off, Ron, thank you for all your
good work with the McKenna manportfolio.
Voices (07:42):
Yes.
Mostly Uncle Frank (07:44):
As most of you know, here we do not have
any sponsors on this program,but we do have a charity we
support.
It's called the Father McKennaCenter, and it supports hungry
and homeless people inWashington DC.
Ron has gotten creative withsupporting the Father McKenna
Center and has come up with aportfolio out of which he is
distributing money on a periodicbasis to the center, and so
(08:08):
whenever he writes in about it,it's going to be the first email
.
How about that?
Voices (08:13):
Surely you can't be serious.
I am serious, and don't call meShirley.
Mostly Uncle Frank (08:18):
The reason it's called the McKenna man
Portfolio is because a McKennaman is somebody that we refer to
, who has come through thecenter as a homeless person and
has been able to reclaim theirlife with the help of the center
and our executive director.
Our current executive director,dennis, is a McKenna man
(08:38):
himself.
We both attended Georgetown LawSchool around 1990 and went off
into legal careers, and heworked for law firms and some
investment banks, but at acertain point he had a problem
with alcohol and lost it all andended up on the street.
But over the past 10 to 15years he came through the center
(08:59):
and has been able to reclaimhis life and now works in social
services, and so we brought himon as the new executive
director in January of 2024.
And he is someone I very muchenjoy working with in my role as
treasurer and head of thefinance committee.
But if you do give to thecenter, either the way that Ron
(09:20):
has done or the more traditionalway, you can go to the Father
McKenna website and go to thedonation page and just give
there, or you can go to oursupport page at
wwwriskprioritywaycom and becomeone of our patrons on Patreon.
By the way, if you give to thecenter and tell me in your email
, I will move your email to thefront of the line, and so thank
(09:46):
you once again for your support,ron.
But now let's get to yourquestions.
What you are talking about withyour withdrawal strategy is
basically what is known as aguard rails kind of strategy.
The most popular ones of thoseare the Geithen-Klinger strategy
or what is called the KitsisRatchet.
These are described in thenotes for the retirement
(10:09):
spending chart at PortfolioCharts, which also allows you to
model these kind of variablespending scenarios, and I would
suggest you take your parametershere and go over there and
check them out.
What you will find generally isthat these kind of strategies
do tend to increase flexibilityand your ability to spend money
(10:34):
overall, even though there is avariable aspect to them involved
, or I should say, becausethere's a variable aspect to
them involved that you'rewilling to spend less money in
certain years and not just moremoney every year.
Morningstar has run these kindsof strategies in their sort of
annual state of retirementreport and found that they do
(10:56):
tend to add one percent or moreto a base safe withdrawal rate
when implemented.
So they certainly are a goodidea if you can deal with the
complexity of them a relativecomplexity of them.
Now, as to inflation, we'vetalked about that at length in
episode 336 and also morerecently in episode 403.
(11:19):
But if you are going toestimate inflation for
retirement, you should startwith the base rate for it, and
there have been a number ofstudies run that basically show
that a retiree, or reallyanybody that is over about 50,
experiences inflation at lessthan the CPI usually 1% to 2%
less than the CPI.
(11:39):
And when Morningstar has runthat kind of base rate in their
calculations, they have foundthat it effectively increases
the safe withdrawal rate bybetween 0.5% and 1%.
Basically, what's going onthere for most people is that
the only thing that they havethat is inflating at greater
than the CPI is typically healthcare, and everything else on
(12:02):
that CPI smorgasbord list ofexpenses tends to inflate at
less than that.
Our own experience over thepast five years is our spending
has been relatively flat overalland certainly down since all of
our children are out of collegenow.
So really I think the best wayto assess this is to look at
your own numbers over the courseof years and see whether they
(12:26):
are actually inflating or not,because personal inflation is
more personal than just aboutanything else in personal
finance and bears littleresemblance to public figures
like the CPI, because you haveto remember that the CPI figures
include people who are justspendthrifts and don't keep
track of their money, but alsoincludes people in the first
(12:49):
half of life who are engaging inhousehold formation and having
children and naturally spendingmore money because they have
more mouths to feed, if you will.
So it makes sense that thataverage is actually going to be
more than what retirees arelikely to experience and what
you should start with as a baserate.
(13:09):
If you haven't calculated yourown personal inflation rate and
this is actually one of the keyways that people misuse
retirement calculators Insteadof using base rates, which is
the core principle of goodforecasting and good decision
making, they do things that arecognitively biased, and the
(13:30):
cognitive bias here is actuallycalled the possibility effect.
It's what if this happens?
Or what if that happens,without any reference to whether
something is likely to happen,equating mere possibility with
likelihood or substantialprobability.
If you do that, you're justgoing to be making bad
forecasting decisions.
This is straight from Kahnemanand Tversky.
(13:50):
In order to make good forecasts, you need to start with base
rates in whatever you'reforecasting, whether it's your
retirement, inflation, running abusiness, completing a project
on time, whatever it is.
Voices (14:03):
I'm asking you to do that.
But what's easy to do is whatEasy not to do.
Mostly Uncle Frank (14:15):
And if you're not doing that, you are
just doing it wrong.
Forget about it.
So you may want to go back toyour never retirement calculator
and fix that problem, if thatis a problem for you.
Anyway, thank you again foryour support, ron and the
wonderful McKenna man portfolio,and thank you for your email.
Voices (14:31):
You follow all instructions and you Set it and
forget it, set it and forget it,set it and forget it.
It's as simple as that, folks.
Second off Second off.
Mostly Uncle Frank (14:47):
Second off we have an email from Ian.
Mary and Voices (14:50):
In your preparation for your
examinations.
If you don't do your revisionproperly, do you know what will
happen?
Mostly Uncle Frank (15:05):
You shall not pass.
And Ian writes.
Mary and Voices (15:10):
Hi Frank, I hope you are well.
I continue to be bothentertained and amused by your
regular podcasts.
I make you laugh.
I'm here to fucking amuse you.
What do you mean?
Funny?
Funny, how?
How am I funny?
You were kind enough to replyto my email in episode 386.
For the benefit of your Britishlisteners, you referenced UK
content providers, pensioncraft,who I agree are good.
(15:33):
I include a link here for arecent post from another UK blog
called Moneyvator.
They did a recent post on AssetAllocation Quilt the winners
and losers of the last 10 years.
I'm sending this as I thoughtyou might be interested.
It seems right up your street.
The guys at Moneyvator seempretty clued up, but putting
this to you as a tribute, as youare the capo de copy of Risk
(15:55):
Parity After All.
Voices (15:57):
Yeah, baby, yeah.
Mary and Voices (15:59):
You may or may not find this interesting, but
we listeners would be interestedin your thoughts and it might
lead to some interestingdiscussion.
Keep up the good work andthanks for all you do.
All the best, ian.
Mostly Uncle Frank (16:11):
Well, thanks for sharing that reference, ian
.
I'm always kind of at a losswhen people from outside the
United States ask me forresources because I'm really not
up on them.
But I note that a lot of ourBritish listeners seem to be
more up on it than I am, and I'mglad when you share these
things with us.
So that quilt chart looked veryinteresting, I noted.
(16:35):
I think gold was the third bestperformer over the past 10
years, at least in pounds, and Ithink that that's generally
true for a lot of currenciesthat are not the US dollar.
For the few of you who don'tknow what a quilt chart is, it
basically looks at a group ofassets and then ranks them by
(16:55):
performance for a series ofyears.
Usually you'll see a 10-yearquilt chart with 10 assets in it
, but you can see over time howdifferent assets rise to the top
or fall to the bottom.
Now I had seen in the pastcouple of months another site
with a whole bunch of differentquilt charts that ranked various
(17:16):
different assets and differenttime frames, including one that
was a quilt chart by decades.
I haven't been able to refinethat.
I will link to it.
If I ever do again.
I'm sure I will run into it atsome point.
I also noted that there was alink on this Munivator site to
something called Just ETF, whichis also British-based and talks
(17:38):
all about ETFs.
I will link to that in the shownotes as well.
That looked like a very usefulsite for people looking for
particular ETFs that doparticular things or just
explaining the concept of themto people outside the US.
So I'll put these links in theshow notes so people can check
them out, and thank you for youremail.
Voices (18:01):
You shall not pass.
Mostly Uncle Frank (18:10):
Next off, we have an email from the
mysterious visitor number 7314,who did not provide a name.
Voices (18:21):
I have no name.
Well, that right there may bethe reason you've had difficulty
finding gainful employment.
Mostly Uncle Frank (18:27):
And our anonymous visitor writes.
Mary and Voices (18:30):
I see that most of your portfolios suggest
using long and short-termtreasuries.
I have access to the G Fund,also known as the Government
Securities Investment Fund,which pays investors the higher
yield that comes fromlonger-term US government bonds,
but does so without the risk oftheir day-to-day market price
fluctuations.
Is this a good option forreplacing long and short-term
(18:53):
treasury bonds?
Mostly Uncle Frank (18:57):
Yes, the G fund in the TSP lineup is a good
short-term bond fund and so, tothe extent you would need an
allocation to short-term USgovernment bonds, you can
certainly use the G fund.
However, you would not use thatas a substitute for long-term
bonds, because it's doingsomething different.
(19:18):
If you want to listen, listento Bond episodes, go back and
listen to episodes 14, 16, 64,and 69.
And what you will learn in anutshell is that you can
essentially use bonds for threethings.
One is stability, as in theydon't go up or down very much
(19:39):
and pay something.
Another one is income, whereyou actually are trying to get a
high income out of the bond.
And the third one isdiversification, where you are
trying to select bonds that arethe most diversified from the
other assets in your portfolio.
Now, we do not use bonds forincome in these kind of
(19:59):
portfolios.
We're only looking at bonds forstability and diversification.
If you were using bonds forincome, you might actually pick
something like a preferredshares fund instead of the bond
fund, because it pays at a highrate and it also pays a
qualified dividend.
But the reason we primarily donot look to bonds for income is
(20:21):
that what we are interested inwith respect to the returns of
assets is their total return,not what income they pay off,
good, because we live in an eraof no-fee trading.
So you would actually preferyour asset to not pay income and
just keep the money in theasset, retain it, which would
(20:44):
make the price go up, and thenbe able to sell it periodically
and only pay the taxes when yousell it.
So having income coming out ofan asset is not an advantage.
In fact it's a disadvantage inmany cases, because the first
word that comes after income istaxes.
Mary and Voices (21:00):
That's not an improvement.
Mostly Uncle Frank (21:03):
So, as a proposition, we know that bonds
are not going to have totalreturns that are going to exceed
stocks, so we are not holdingbonds ever for their return
profile or their income.
We are only going to hold themfor stability or diversification
, in which case the amount ofincome they're paying is not
(21:25):
their key factor.
The key factor when you'retalking about stability and
diversification is the durationor length of the bonds at issue.
If you have short durationbonds or things like T-bills,
those are very stable, but theydon't offer a whole lot of
diversification.
They're basically inert.
(21:45):
They don't go up, they don't godown, regardless of what other
assets do.
If you want diversification outof bonds, you typically have to
go out on the duration spectrumand look at only the highest
quality bonds, which are USTreasury bonds, and those happen
to be the bonds that are themost diversified from stocks,
whether those be US stocks orforeign stocks.
(22:06):
And we're actually seeing thatplay out this week, with bonds
being one of the things.
Particularly long-term bondsincreased in value last week
while stocks were falling invalue, which is going to create
some rebalancing opportunitiesin the near future.
So whenever you're thinkingabout holding bonds, you first
need to know why you are holdingthem, and I suggest it's
(22:29):
certainly not for their returnprofile, because if you wanted a
higher return profile, you'dhold stocks or something else.
You would not hold bonds.
And then the next question iswhat purpose are they serving in
your portfolio?
Is it for more for stability,or is it more for
diversification?
And you would select the bondsthat fulfill that role the best.
(22:50):
If you wanted both things, youwould select two funds one that
does the stability thing, ashort-term bond fund, and one
that does the diversificationthing, a long-term bond fund.
But those are two differentanimals that do two different
things, so you never want toconfuse them or think you can
substitute one for the other,because it doesn't work that way
.
Forget about it.
(23:12):
For those of you who want tohear more about that, I would
suggest you go back and listento those old episodes, because
this is something that I findamateur investors are very
confused about and get fixatedon the interest rate paid and
not on the purpose of having thebonds in the first place.
Voices (23:30):
That's the fact, jack.
That's the fact.
Mostly Uncle Frank (23:33):
Jack and so amateurs repeatedly pick the
wrong bonds for what they thinkthe bonds are doing, and in many
worst case scenarios theyactually pick bonds that are
highly correlated with theirstocks but don't yield as much,
so it's a completely pointlessexercise.
Voices (23:50):
Hopefully that helps and thank you for your email you
don't tell your papi how to cutthe electorate.
We ain't one at a time in herewe're mass communicating.
Mary and Voices (24:01):
Oh yes, that's a powerful new force take a leg
junior.
Mostly Uncle Frank (24:07):
Last off.
Last off of an email from MrData.
I am not less perfect than Lore, and Mr Data writes Hi, frank,
you often speak of Mr Merriman.
Mary and Voices (24:21):
I took it upon myself to learn about his
portfolios and ideas.
Merriman, I took it upon myselfto learn about his portfolios
and ideas.
I found that he's a fan ofsmall cap growth funds and
several of his portfoliosrecommend them.
I also heard in severalepisodes that you don't
recommend them.
I'd like your opinion and whyyou two differ on this asset
class specifically.
Thanks, mr Data.
Feel free to play some StarTrek the Next Generation, mr
(24:44):
Data.
Sound clips.
Voices (24:47):
I am not less perfect than Lore.
I am not less perfect than LoreEnough.
Both of you sit down.
Mostly Uncle Frank (24:57):
Well, it appears that Mr Data has a
problem with his programmingchips these days programming
chips these days.
Mary and Voices (25:09):
Data intoxication is a human
condition.
Your brain is different.
Voices (25:11):
It's not the same, as we are more alike than unlike, my
dear captain because paulmerriman is not a fan of small
cap growth funds that's not howit works.
Mary and Voices (25:23):
That's not how any of this works.
Mostly Uncle Frank (25:25):
He's a fan of small cap value funds, which
are much different than smallcap growth funds, and, in fact,
if you listen to him, he willsay that small cap growth is
probably the factor combinationthat you want to avoid.
Mary and Voices (25:39):
You fell victim to one of the classic blunders.
Mostly Uncle Frank (25:42):
And not include in your portfolio
because it has an inferior riskreward profile.
It's a lot of risk, but notthat much more reward than you
would find from the stock marketgenerally.
So if you want my opinion onwhy we differ on this asset
specifically, the answer is wedo not differ on this asset
(26:03):
class specifically.
I'm telling you, fellas, you'regoing to want that cowbell, I
will say I am a bit lesssanguine on whether small cap
value is likely to outperformthe stock market generally or in
the future, because the mainreason that we are interested in
(26:40):
small cap value and valuestocks as a category here is
because they are diversifiedfrom growth stocks.
In 2022, you would see a verydisparate performance between
growth stocks and value stocks.
Voices (26:55):
Data.
You are fully functional,aren't you, of course?
But how fully?
In every way, of course.
Mostly Uncle Frank (27:02):
I am programmed in multiple
techniques, a broad variety ofpleasuring, which would then
allow you to rebalance out ofthe better performer into the
lower performer.
So in 2022, your value stocksmay have been down 10% to up 10%
, whereas your growth stockswere probably down over 30%.
(27:25):
That huge difference inperformance would have let you
rebalance out of the valuestocks into the growth stocks
and then experience greatergrowth and performance when the
growth stocks recovered the nextyear.
Voices (27:40):
You, jewel, that's exactly what I hoped.
You, jewel, that's exactly whatI hoped.
Mostly Uncle Frank (27:46):
This is a mathematical idea called
Shannon's Demon, which is whydiversification works, or why
you get a better performance outof two similar assets that
perform differently at differenttimes than you would out of
either one of them alone.
And that is the fundamentalreason why, in these risk parity
(28:07):
style portfolios, we want tohave half of our stocks in
growth or growth leaning and theother half in value or value
leaning, because it's going tobe more diversified and allowed
for these rebalancings over time, which will make that
combination perform better thaneither one of them alone, and so
(28:27):
we don't need to worry aboutwhether one is outperforming the
other one.
All we really care about is thefact that they are both
performing and performingdifferently at different times.
So hopefully a little bit ofthat reprogramming helps you, mr
Data.
Ah, good Data.
Voices (28:44):
At least you're functioning fully, captain, if
you prick me, do I not leak?
Mostly Uncle Frank (28:56):
And thank you for your email.
Mary and Voices (28:59):
And now for something completely different.
Voices (29:03):
What is that?
What is that?
What is it?
Mostly Uncle Frank (29:21):
Oh no, not the bees.
The bees certainly descended onstock markets last week.
As we mentioned in the opening,this was one of the worst
two-day performances ever forthe stock market and one of the
oddest reasons for that, whichis a policy error by the US
government, and so, as aconsequence, what markets are
flashing these days is recession, essentially.
So what I find actuallyinteresting is that, although
(29:44):
the cause of the impendingrecession here is kind of unique
, the way the markets arebehaving is very typical for
markets that are going into arecessionary period.
What I mean by that is, thestock markets are falling
steeply.
Meanwhile, the US Treasury bondsare rising as people buy more
(30:05):
of those bonds, in particular,on the long end.
You'll see that that has goneup several percent this week,
and you also just saw somegeneral selling, or panic
selling, of all risk assets,including gold gold.
(30:29):
But if this plays out like theearly 2000s or like the 2008
period, what you are likely tosee, after all of the selling is
done, or mostly done, is thatthings like gold will recover
more quickly, and also it islikely that people will buy more
value stocks, whereas growthstocks will remain down for
longer.
At least, that is the generalpattern of recessions and is
fundamentally why we're holdingportfolios like this.
(30:51):
Because this pattern repeatsover and over again.
You just don't know when it'sgoing to come upon you.
Mary and Voices (30:58):
A crystal ball can help you, it can guide you.
Mostly Uncle Frank (31:03):
But as a consequence, these kind of risk
parity portfolios just aren'thurting very much compared to
the overall markets because theyhave more diversification and
they will have rebalancingopportunities coming up in the
future.
But just looking at the marketsfor the year so far, the S&P
500, represented by VOO, is down13.3% for the year.
(31:27):
The NASDAQ, represented by QQQ,is down 17.2% for the year.
I think the overall NASDAQmarket is actually in bear
market category and is down over20%.
Small cap value, represented bythe fund VIOV, is down 18.78%
for the year.
Gold is still up substantially,although it lost a couple of
(31:49):
percent last week.
Mary and Voices (31:51):
I love gold.
Mostly Uncle Frank (31:54):
A representative fund, gldm, is up
15.7% for the year this was theweek of long-term treasury
bonds and a representative fund,vglt, is now up 7.2 percent for
the year.
So it has returned to havingthat negative correlation with
(32:19):
the stock market, which is whathappens during recessions and
has happened in every recessionsince at least the 1950s.
Reits, represented by the fundREET, are now down 5.14% for the
year not nearly as bad as therest of the stock market.
Commodities, represented by thefund PDBC are down 2.31% for
(32:40):
the year.
Preferred shares, representedby the fund PFFV, are down 1.68%
for the year and managedfutures managed to be down.
Represented fund DBMF was down4.92% for the year.
So again, this was kind oftypical recession era behavior
last week Panic, selling in allrisk assets and buying of bonds,
(33:02):
excelling in all risk assetsand buying of bonds.
The one thing that actually wasmore unusual is that the US
dollar also fell last week, andusually in a recessionary
environment the US dollar isrising.
But I think that that isrelated to the particular cause
of this recessionary impulse,which is going to favor
(33:24):
investments in foreign assetsover US assets, even though
everybody's going to be hurting.
So don't think that you'regoing to escape the downturn in
global stock markets byinvesting in a particular
country.
It's just going to be the casethat some are going to be worse
than others, and the US seems tobe leading the way down, at
(33:45):
least right now.
Moving to these portfolios, thefirst one's the All Seasons.
This is a reference portfolio.
It's only 30% in stocks and atotal stock market fund, 55% in
intermediate and long-termtreasury bonds and the remaining
15% divided into gold andcommodities.
It is down 2.57% for April.
(34:06):
So far, four days of April, itis actually flat for the year 0%
year-to-date and it's up 8.56%since inception in July 2020.
For April, we are distributing$31 from cash that has
accumulated.
Let's say, at a 4% annualizedrate, that'll be $125
(34:28):
year-to-date and $1,815 sinceinception in July 2020.
All of these portfolios startedwith about $10,000 in them.
Moving to thesebread-and-butter kind of
portfolios, first one's a goldenbutterfly.
This one is 40% in stocksdivided into a total stock
market fund and a small capvalue fund, 40% in bonds divided
(34:50):
into long and short termtreasuries, one for stability
and one for diversificationGuess which one is which?
And 20% in gold GLDM.
It is down 3.86% month-to-datefor April.
It's down 1.78% year-to-dateand up 31.55% since inception in
(35:10):
July 2020.
So you're probably sleepingpretty well at night if you have
that one or something like it.
Voices (35:17):
Snooze and dream.
Dream and snooze.
The pleasures are unlimited.
Mostly Uncle Frank (35:22):
We'll be distributing $45 for April.
Treasures are unlimited.
We'll be distributing $45 forApril.
It's going to come out of GLDM,the gold fund, which has been
the best performer this year.
It's at a 5% annualized rate.
That'll be $182 year-to-dateand $2,483 since inception in
July 2020.
Next one's golden ratio.
This one is 42% in stocksdivided into a large cap growth
(35:46):
fund and a small cap value fund,26% in long-term treasury bonds
, 16% in gold, 10% in managedfutures and 6% in cash in a
money market fund.
It is down 4.21% for the monthof April.
So far.
It's down 4.24% year to dateand up 24.44% since inception in
(36:07):
July 2020.
We'll be taking $43 out of it,which always comes out of cash
in this portfolio.
That's for April at a 5%annualized rate.
That'll be $174 year-to-dateand $2,435 since inception in
July 2020.
Next one's the risk parityultimate.
It's kind of our kitchen sinkhere.
I'm not going to go through all14 of these funds.
(36:29):
I do note there's aninteresting one called BTAL,
which is a long short fund thatgoes long value and short growth
, and that one is up fairlysubstantially this year,
although it was down on Friday.
So this portfolio is down 4.89%month to date.
For April.
It's down 4.2% year to date andup 16.35% since inception in
(36:54):
July 2020.
For the month of April, we'rewithdrawing at a 5% annualized
rate That'll be $39 from thegold fund.
Gldm would be $158 year-to-dateand $2,608 since inception in
July 2020.
Now moving to theseexperimental portfolios
involving leveraged funds.
We do hideous experiments here,so you don't have to.
Voices (37:17):
Look away, I'm hitting you.
Mostly Uncle Frank (37:19):
First one's the Accelerated Permanent
Portfolio.
It is 27.5% in a levered bondfund TMF, 25% in a levered stock
fund UPRO, 25% in PFF, apreferred shares fund, and 22.5%
in gold GLDM.
It's down 4.74% month-to-date.
It's down 0.95% month-to-date.
(37:42):
It's down 0.95% year-to-dateand up 0.07% since inception in
July 2020.
This will almost certainly berebalanced on the 15th of this
month if current trends continue, since the stock fund is down
to 15% of the portfolio when itusually is at 25%.
(38:02):
But we shall see what happensbetween now and the 15th when we
actually look at this forrebalancing purposes.
So we'll be taking $38 out ofit from cash accumulated cash
for April.
It's a 6% annualized rate.
It's $156 year-to-date and$2,786 since inception in July
2020.
Next one's the aggressive 50-50.
(38:25):
This is the most levered andleast diversified of these
portfolios.
It's one-third in a leveredstock fund UPRO, one-third in a
levered bond fund TMF and theremaining third in Ballast,
comprised of a preferred sharesfund and an intermediate
treasury bond fund.
It is down 5.8% month to date.
It is down 7.25% year to dateand down 18.31% since inception
(38:48):
in July 2020.
It's very easily the worstperformer of all of these
portfolios, which is funnybecause it was the best
performer at one time, but thatis a consequence of all the
leverage and a lack ofdiversification.
For April, we'll be taking $32out of it from the Intermediate
Treasury Bond Fund, vgit.
It'll be at a 6% annualizedrate, $132 year-to-date and
(39:19):
$2,801 since inception, july2020.
Now moving to the next one.
This is the levered goldenratio portfolio.
It is 35% in a compositelevered fund called NTSX that is
the S&P 500 and treasury bondsin it, 20% in gold, gldm, 15% in
an international small capvalue fund, avdv.
Then it's got 10% in KMLM,which is a managed futures fund,
(39:41):
10% in a levered bond fund, tmf, and the remaining 10% divided
into UDOW and UTSL, which arelevered value funds.
Following the Dow and theUtilities Index, it is down
6.96% month-to-date.
It's down 4.7% year-to-datepercent month to date.
(40:05):
It's down 4.7 percent year todate and down 8.92 percent since
inception, july 2021.
It's a year younger than theother ones.
For April, we'll be taking $33out of it from accumulated cash.
It's at a 5 percent annualizedrate.
It'll be $134 year to date and$1,690 since inception, july
2021.
And the last one is the Optraportfolio.
This is a return stacked styleportfolio.
(40:27):
It is 16% in a leveraged stockfund, upro, 24% in a worldwide
value fund called AVGV, 24% inGOVZ, which is a US Treasury's
STRIPS fund, and the remaining36% divided into gold and
managed futures.
It is down 6.57% month to date.
(40:50):
It is down 5.61% year to dateand down 2.86% since inception
in July 2024.
It's only about nine months old.
For April, we are withdrawing$50 from GLDM.
That's at a 6% annualized rate.
It'll be $203 year-to-date and$463 since inception in July
(41:13):
2024.
And that concludes ourportfolio reviews for the week
and the month Boring and what wecan see from this, in
particular, with respect to thefirst three portfolios, which
are kind of basic ones that theyare performing, essentially,
how you would draw this up interms of a stock market crash
(41:38):
and the kind of expectedperformance you would see out of
the other assets, which, ifthis continues, is going to be
resulting in some substantialrebalancing when we get to
rebalancing those portfolios inJuly on their annual rebalancing
dates.
So we'll be selling a lot of thebonds and gold and other things
and buying more stocks at lowerlevels.
(41:58):
Buy low, sell high.
Fear that's the other guy'sproblem, but now I see our
signal is beginning to fade.
If you have comments orquestions for me.
Please send them tofrankatriskparityradarcom.
The email isfrankatriskparityradarcom.
Or you can go to the websitewwwriskparityradarcom.
Put your message into thecontact form and I'll get it
(42:22):
that way.
If you have any chance to do it, please go to your favorite
podcast provider and likesubscribe.
Give me some stars, a follow, areview that would be great.
Okay, thank you once again fortuning in.
Voices (42:56):
This is Frank Vasquez with Risk Party Radio signing
off.
Mary and Voices (43:10):
The Risk Parody Radio Show is hosted by Frank
Vasquez.
The content provided is forentertainment and informational
purposes only and does notconstitute financial, investment
tax or legal advice.
Please consult with your ownadvisors before taking any
actions based on any informationyou have heard here, making
sure to take into account yourown personal circumstances.
Popular Podcasts
40s and Free Agents: NFL Draft Season
Daniel Jeremiah of Move the Sticks and Gregg Rosenthal of NFL Daily join forces to break down every team's needs this offseason.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com
The Bobby Bones Show
Listen to 'The Bobby Bones Show' by downloading the daily full replay.