Risk Parity Radio

Episode 400: An AI Thingamabob Takes Over To Review And Reconstruct Our First Five Foundational Episodes

• Frank Vasquez • Season 5 • Episode 400

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In this frolic and detour from our regularly scheduled programming, we create a "Reference Episode" by employing two AI podcasters to summarize the information contained in Episodes 1, 3, 5, 7 and 9, which are some of the foundational episodes for this podcast.  BTW, choose PFFV instead of PFF if you are interested in that.  But the point was to teach you how to analyze investments.

Here are (most of) the original links and notes from those episodes.

Episode 1:

In this episode we answer five basic questions:

1.  What is Risk Parity Radio?

2.  Who is this podcast for?

3.  Gee willikers, what does "Risk Parity" mean anyway, Uncle Frank?

4.  How will will make this real and actionable for you?

5.  How can you get involved?

Episode 3:  

In this episode we explore the ancient origins of asset allocation and diversification.

Bava Metzia 42a:  https://steinsaltz.org/daf/bavametzia42/

70-year History of Investment Consulting:  https://seekingalpha.com/article/4357226-70-year-history-of-investment-consulting-1950minus-2020

Episode 5: 

In this follow-up to Episode 3, we explore the development of risk-parity style investing from the 1980s to the present day.

The All Weather Strategy Paper:   Bridgewater Paper 2009.12 AW Info Pack.doc (granicus.com)

Risk Parity Portfolios:  Efficient Portfolios Through True Diversification:  https://www.panagora.com/assets/PanAgora-Risk-Parity-Portfolios-Efficient-Portfolios-Through-True-Diversification.pdf

Risk Parity:  Silver Bullet Or A Bridge Too Far: chapter-4-from-managing-multiasset-strategies-2018.pdf (callan.com)

Episode 7:

In this episode we discuss the three basic principles are (1) the Holy Grail Principle; (2) the Macro-Allocation Principle; and (3) the Simplicity Principle.

March draw-downs for professional risk-parity style portfolios: https://www.markovprocesses.com/blog/risk-parity-funds-in-the-coronavirus-market-rout/

Ray Dalio explains the Holy Grail principle of risk-parity style investing: https://www.youtube.com/watch?v=Nu4lHaSh7D4

Episode 9:

In this episode we discuss how NOT to choose investments and how to employ a good process to analyze an investment.  We adopt the process of David Stein's 10 Questions and apply it to an exchange-traded fund of preferred stocks.

Ishares description of PFF:  https://www.ishares.com/us/products/239826/ishares-us-preferred-stock-etf

The 10 Questions To Ask When Considering An Investment:
1.  What is it?
2.  Is it an investment, a speculation, or a gamble?
3.  What is the upside?
4.  What is the downside?
5.  Who is on the other side of the trade?
6.  What is the investment vehicle?
7.  What does it take to be successful?
8.  Who is getting a cut?
9.  How does it impact your portfolio?
10.  Should you invest?




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Voices:

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.

AI Podcast Host and Voices:

If a man does not keep pace with his companions, perhaps it is because he hears a different drummer, a different drummer.

Mary and Voices:

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:

Thank you, mary, and welcome to Risk Parity Radio episode 400.

Mostly Uncle Frank:

Today on Risk Parity Radio, we're going to take a break from our regularly scheduled programming and offer you what we will call a reference episode.

Mostly Uncle Frank:

That is designed to help new listeners, but may help some of the old ones too. So this episode will be summarizing the contents of our foundational episodes 1, 3, 5, 7, and 9, which you might want to listen to after you listen to this, if you have not already. To accomplish that, we are using the services of an artificial intelligence large language model device that will create podcasts for you out of the material that you give it, and we have fed into the large language model the contents of each of the episodes 1, 3, 5, 7, and 9, along with the links and other materials that go with those episodes, and so what you will be hearing here are five separate little podcasts in a row that reflect episodes 1, 3, 5, 7, and 9. And you will also find in the show notes all of the links that you would previously find for episodes 1, 3, 5, 7, and 9, copied all into one place for your convenience. So you will not be hearing much of my voice or my antics today.

Voices:

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

Mostly Uncle Frank:

And finally, just one caveat Although the large language model podcast is pretty good, it does mess things up sometimes, and I would say its accuracy is generally only about 85 to 90 percent. So when in doubt, please do rely on the original episodes of 1, 3, 5, 7 and 9. And so, without further ado, first off.

AI Podcast Host and Voices:

First off, we have episode one, all right, so we're going to be looking into this. Risk parity radio. It's a new personal finance podcast, yeah, and it's focused on this concept called risk parity.

AI Podcast Host and Voices:

Ok, I got can weather different economic storms, right?

AI Podcast Host and Voices:

So instead of just thinking about how much you're putting in, stocks versus bonds.

AI Podcast Host and Voices:

It's really about diversifying strategically across a range of assets that react differently to different conditions in the market.

AI Podcast Host and Voices:

OK, so it's not just about picking the right stocks or bonds Right. It's about creating, like a more resilient portfolio overall.

AI Podcast Host and Voices:

Exactly.

AI Podcast Host and Voices:

And this podcast, Risk Parity Radio, seems to be all about showing you how to do that yourself.

AI Podcast Host and Voices:

Yeah, they give you really actionable advice.

Voices:

Okay.

AI Podcast Host and Voices:

Not just theoretical concepts.

Voices:

Okay.

AI Podcast Host and Voices:

They have real portfolios that they're tracking and monitoring on their website.

AI Podcast Host and Voices:

Okay, got it.

AI Podcast Host and Voices:

And they do two episodes every week. One is more discussion-based and the other one is a portfolio review. Okay, so it's wwwriskparityradiocom if you want to check it out.

AI Podcast Host and Voices:

But with six different portfolios that they're tracking, I'm already feeling a bit overwhelmed. Yeah, how would someone even know where to begin?

AI Podcast Host and Voices:

Well, that's a fair point.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

Six portfolios is a lot to take in, especially if this is a new approach to you. But that's where understanding the logic behind each one comes in.

AI Podcast Host and Voices:

OK, right.

AI Podcast Host and Voices:

They're not just random groups of assets.

Mostly Uncle Frank:

Yeah.

AI Podcast Host and Voices:

Each one is built based on specific principles and goals. Ok, for example, the all seasons portfolio, which is inspired by Ray Dalio right, aims to perform well across different economic scenarios like inflation, deflation, growth, recession, you name it. It's like building a financial fortress designed to withstand any kind of weather.

AI Podcast Host and Voices:

So it's about having a strategy that's not just chasing those high returns but also protecting your capital when things get a little rocky. Right, exactly, yeah that makes a lot of sense, especially with today's unpredictable market.

Voices:

Yeah.

AI Podcast Host and Voices:

But what about those good uncorrelated bets that we were talking about? Yeah, how do those fit into the risk parity picture?

AI Podcast Host and Voices:

That's a key piece.

AI Podcast Host and Voices:

OK.

AI Podcast Host and Voices:

Uncorrelated assets are those that don't move in the same direction as the stock market.

Voices:

OK.

AI Podcast Host and Voices:

So, while stocks might be doing really well, these assets might be holding steady or even going up slightly. Okay, Think of it like having backup generators for your house If the main power grid goes down. You've still got some lights on right.

AI Podcast Host and Voices:

So it's like having a plan B.

AI Podcast Host and Voices:

Exactly, or even a plan C.

AI Podcast Host and Voices:

Yeah, or a plan C built into your portfolio. Right, that's pretty clever. Yeah, but even a plan C, yeah, or a plan C built into your portfolio, right. That's pretty clever, yeah, but actually finding these uncorrelated investments. Yeah. That sounds like it could require like a PhD in finance.

AI Podcast Host and Voices:

It can seem daunting.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

But that's where a risk parity radio comes in. Okay, they really break down these concepts into bite-sized pieces. You know, they use real-world examples and even some humor to make it all less intimidating. Yeah, and then, by tracking these six portfolios, they're basically doing the research for you. They're showing you how these strategies actually perform in real time.

AI Podcast Host and Voices:

Okay, so they're kind of taking the guesswork out of it. Right, which is definitely time. Okay, so they're kind of taking the guesswork out of it Right, which is definitely appealing. Yeah, but you mentioned that each portfolio has its own logic and goals. They do. Can you give me an example of how they differ?

AI Podcast Host and Voices:

Absolutely. Let's take the golden butterfly portfolio. Okay. This one incorporates a mix of stocks, bonds, gold and commodities. Okay, and it's designed to be relatively conservative, aiming for steady growth with lower volatility than just a pure stock portfolio. Okay, and the name Golden Butterfly actually comes from the shape of its risk profile. When you chart it out, it's a visual representation of how the portfolio is designed to perform in different market conditions.

AI Podcast Host and Voices:

Interesting, so there's a reason behind the name.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

It's not just like a catchy marketing ploy, but with all this talk of diversification and these uncorrelated assets, I'm wondering if there's a risk of spreading yourself too thin. Could some of these assets still lose value, even if they're not directly tied to the stock market?

AI Podcast Host and Voices:

That's a really smart question.

Voices:

Yeah.

AI Podcast Host and Voices:

And it's one that Frank Vasquez addresses head on in the podcast. Okay. He acknowledges that no investment strategy is foolproof. Right yeah, Even with diversification, there's always a risk, like a perfect storm scenario.

Mostly Uncle Frank:

Right.

AI Podcast Host and Voices:

Where multiple asset classes take a hit.

AI Podcast Host and Voices:

Okay, so it's not about eliminating risk entirely Exactly, but it's about managing it. Yes. In a way that aligns with your goals and your comfort level.

AI Podcast Host and Voices:

Exactly. Risk parity is about recognizing that risk is inherent in any investment, and it's about finding that balance right. Yeah. Between the potential reward and the potential downside. Okay. It's more nuanced than just chasing the highest returns or hiding all your money under a mattress.

AI Podcast Host and Voices:

Right. And speaking of nuance, let's talk about these experimental portfolios that involve leverage. Those sound a little riskier right.

AI Podcast Host and Voices:

They do carry more risk, but also the potential for higher returns. Leverage essentially means using borrowed money to amplify your investment. Think of it like using a lever to lift a heavy object you can move more weight with less effort, but if you lose control of that lever, things can go wrong quickly.

AI Podcast Host and Voices:

So it's a powerful tool it is. But one that needs to be handled with extreme caution.

AI Podcast Host and Voices:

Yes, exactly.

AI Podcast Host and Voices:

Tell me more about these leverage portfolios.

AI Podcast Host and Voices:

Okay, so one of them is the accelerated permanent portfolio.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

It takes the classic permanent portfolio, which is known for its stability. Yeah. And adds leverage to potentially boost returns.

Voices:

Okay.

AI Podcast Host and Voices:

Then there's the accelerated 50-50, which takes the traditional approach of splitting your investments equally between stocks and bonds. Right, and you guessed? It adds leverage to the mix.

AI Podcast Host and Voices:

OK, so these are like the turbocharged versions. Yeah exactly Of those more conservative strategies. Right, but before I get too excited about these turbocharged returns, I have to ask what kind of downsides are we talking about here?

AI Podcast Host and Voices:

Well, the main downside is that leverage magnifies both gains and losses. Okay, so if your investments go up, you'll see bigger profits, but if they go down, your losses will be amplified as well.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

It's not a strategy for the faint of heart Right or for those who can't stomach volatility.

AI Podcast Host and Voices:

So it's not a free lunch Right. You're taking on more risk Exactly In exchange for the potential for those higher returns.

AI Podcast Host and Voices:

That's a great way to put it. Yeah, and that's why risk parity radio emphasizes really understanding your own risk tolerance before you go into any investment strategy, especially one that involves leverage.

AI Podcast Host and Voices:

Right, that's a responsible approach.

AI Podcast Host and Voices:

It is.

AI Podcast Host and Voices:

It sounds like they're not just throwing out ideas. No, they're really trying to guide listeners to make informed decisions that align with their situation Exactly, yeah.

AI Podcast Host and Voices:

They're giving you the tools and knowledge, but ultimately, the decision of what to invest in and how much risk to take is up to you.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

It's about becoming your own financial architect, so to speak.

AI Podcast Host and Voices:

I like that analogy. Yeah, the financial architect. Yeah, it implies that there's a thoughtful process.

AI Podcast Host and Voices:

Exactly.

AI Podcast Host and Voices:

It's not just throwing darts at a stock board or something.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

But with all this talk of portfolios and strategies, I'm kind of wondering about the man behind the curtain. What can you tell me about this, frank Vasquez?

AI Podcast Host and Voices:

Well, from what I've gathered, Frank Vasquez is a seasoned investor. Okay. And he seems really passionate about sharing his knowledge and empowering people to take control of their finances. He seems very down to earth.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

No flashy guru vibes or get rich quick schemes.

AI Podcast Host and Voices:

So he's not promising overnight riches.

AI Podcast Host and Voices:

No, not at all.

AI Podcast Host and Voices:

Or selling some secret formula.

AI Podcast Host and Voices:

Not at all. Okay. He's very transparent about the risks involved in investing.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

And he really emphasizes the importance of a long-term, evidence-based approach. Yeah, he even encourages listeners to challenge his ideas and to do their own research.

AI Podcast Host and Voices:

Okay, I appreciate that. Yeah, it appreciate that.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

It shows that he's not just trying to push his own agenda. Right. He genuinely wants listeners to become, you know, informed and empowered investors.

AI Podcast Host and Voices:

Precisely. He seems to believe that knowledge is power.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

Especially when it comes to money.

AI Podcast Host and Voices:

That's a philosophy I can get behind.

AI Podcast Host and Voices:

Yeah, for sure.

AI Podcast Host and Voices:

It sounds like Risk Parity Radio is more than just a podcast. It is. It's like a community, yeah, a learning resource, a guide for anyone who wants to take control of their financial future.

AI Podcast Host and Voices:

It definitely seems that way, yeah, and what's really interesting is that Frank Vasquez weaves in a lot of historical context into his discussions.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

He talks about investment strategies that predate modern markets, which I think helps us to understand the underlying principles of risk parity and how it's evolved over time.

AI Podcast Host and Voices:

Ah, so it's not just some new, newfangled trend, it's a strategy that's got some deep roots. Exactly that adds a layer of credibility, don't you think?

AI Podcast Host and Voices:

Absolutely, and it shows that these principles have stood the test of time, which is reassuring when you're dealing with something as important as your financial well-being.

AI Podcast Host and Voices:

Okay, so we've established that this risk parity radio is about building resilient portfolios, right Understanding risk and finding those good, uncorrelated bets. But why should someone actually invest their time and energy into learning about this approach? What are the potential benefits?

AI Podcast Host and Voices:

Well, I think the most compelling benefit is that risk parity is really designed for long-term success. It's not about chasing quick returns or trying to time the market. It's about building a robust portfolio that can weather those different economic storms and generate consistent returns over time. Okay. Like planting a tree that will provide shade for years to come, rather than trying to grow a quick crop that might wither in the next drought.

AI Podcast Host and Voices:

That's a powerful analogy.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

So it's about creating a portfolio that can support your long-term goals. So it's about creating a portfolio that can support your long-term goals. Okay, whether that's retiring, buying a house, funding your children's education.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

All of that and risk parity can be particularly appealing for those approaching retirement Absolutely or those who are already retired right.

AI Podcast Host and Voices:

Yes.

AI Podcast Host and Voices:

By diversifying beyond those traditional stock and bond allocations, you can potentially reduce volatility and protect your nest egg from those market swings.

AI Podcast Host and Voices:

Right, it's a huge concern for a lot of retirees.

AI Podcast Host and Voices:

It is especially for those who rely on those investments for income. Right, absolutely yeah.

AI Podcast Host and Voices:

And remember, risk parity isn't just about playing defense right. It's also about seeking growth opportunities, but in a way that aligns with your risk tolerance.

AI Podcast Host and Voices:

So it's not about sacrificing returns for safety.

AI Podcast Host and Voices:

No, not at all.

AI Podcast Host and Voices:

It's about finding that sweet spot between the two.

AI Podcast Host and Voices:

Exactly, and by understanding these principles, you can potentially achieve better risk-adjusted returns over the long run, which means more potential for growth without taking on too much risk.

AI Podcast Host and Voices:

That sounds like a win-win.

AI Podcast Host and Voices:

It is.

AI Podcast Host and Voices:

Okay, I'm sold this risk parity radio is definitely worth a listen.

AI Podcast Host and Voices:

It is.

AI Podcast Host and Voices:

But before I go down this rabbit hole, is there anything else we should know about those six portfolios that they're tracking? You mentioned the all-se seasons and the golden butterfly, but what about the other four?

AI Podcast Host and Voices:

You're right, we've only just scratched the surface here. Yeah. Let's dive into those other four portfolios. You mentioned the golden ratio right, yeah, the golden ratio.

AI Podcast Host and Voices:

This is where Frank Vasquez seems to put his money where his mouth is. Okay, he actually uses this one himself, and instead of just throwing a bunch of assets together, this portfolio uses the golden ratio.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

That mathematical concept you see everywhere, yeah, from nature to art.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

To determine the allocation Interesting Across those different assets.

AI Podcast Host and Voices:

So he's not just diversifying for the sake of diversification. Right, there's an actual mathematical framework, yeah, guiding the allocation.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

I'm sensing a theme here.

Voices:

Yeah.

AI Podcast Host and Voices:

A blend of historical context and mathematical principles.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

Applied to investing today.

AI Podcast Host and Voices:

Yeah, yeah, I like that.

AI Podcast Host and Voices:

What about that fourth portfolio?

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

The risk parity ultimate.

AI Podcast Host and Voices:

Yeah, the risk parity ultimate. Well, from what I've gathered, ultimate is a pretty apt description. Okay, this one's for like the truly hardcore diversifiers. Okay, it aims to include a wider range of asset classes than any of the others. Got it Kind of casting a wider net for those uncorrelated returns.

AI Podcast Host and Voices:

So it's the go big or go home version.

AI Podcast Host and Voices:

Yeah, I guess you could say that.

AI Podcast Host and Voices:

Of risk parity. Okay, now the last two portfolios, the ones you said were experimental, that involve leverage. Yeah, this sounds like walking a tightrope.

AI Podcast Host and Voices:

It does, they're definitely not for the risk averse Right. These portfolios take two classic approaches.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

The permanent portfolio Okay, and the 50-50 portfolio and kick them up a notch by using borrowed money.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

To try and, like, supercharge the returns.

AI Podcast Host and Voices:

So it's like adding rocket boosters.

AI Podcast Host and Voices:

Yeah, yeah To an already solid engine.

AI Podcast Host and Voices:

Okay, the potential's there.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

But so is the risk.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

So can you talk a little bit more about how these accelerated portfolios actually work? Okay, so the first one, yeah.

AI Podcast Host and Voices:

But so is the risk, right? So can you talk a little bit more about how these accelerated portfolios actually work? Okay, so the first one yeah, the accelerated permanent portfolio builds on this strategy Okay, developed by Harry Brown back in the 1980s. Right, the original permanent portfolio was really aimed at creating a stable portfolio that could weather any economic storm. Portfolio that could weather any economic storm.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

This accelerated version adds leverage to the mix which, as we said, could potentially amplify gains but also losses.

AI Podcast Host and Voices:

Losses too right? Yeah, I'm noticing a trend here. Yeah, frank Vasquez seems to be taking these proven strategies and exploring how they can be adapted and potentially enhanced for the modern investing landscape.

AI Podcast Host and Voices:

I think that's a really good point.

AI Podcast Host and Voices:

What about that accelerated 50-50 portfolio?

AI Podcast Host and Voices:

Okay, well, that one's a bit simpler in concept. Okay, it takes the classic 50-50 approach.

AI Podcast Host and Voices:

Right Big cloud.

AI Podcast Host and Voices:

Half your money in stocks, half in bonds? Yeah, and, as you can guess, adds leverage to try and boost returns.

AI Podcast Host and Voices:

So just adding a little spice to it.

AI Podcast Host and Voices:

Yeah, yeah, like adding a spicy kick to a tried and true recipe, exactly yeah.

AI Podcast Host and Voices:

I really like how Frank Vasquez tests these strategies in such a realistic way.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

It's one thing to look at historical data, but to actually see how these portfolios perform when you're taking money out of them, like someone would in retirement, for instance.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

I think it just adds a layer of practicality.

AI Podcast Host and Voices:

It does, it really does the whole.

AI Podcast Host and Voices:

Thing.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

It's not just playing with numbers on a spreadsheet. Right, he's simulating real life scenarios, which I think is what sets this podcast apart. It shows you how these portfolios could actually work for you if you were relying on them for income.

AI Podcast Host and Voices:

That's a really crucial point. It is. A lot of investment strategies might look great on paper.

AI Podcast Host and Voices:

They do.

AI Podcast Host and Voices:

But when you actually start withdrawing money, especially during market downturns, they completely fall apart, it's true. So seeing this more practical approach, it's really refreshing.

AI Podcast Host and Voices:

It is. Don't you think, absolutely.

AI Podcast Host and Voices:

Yeah, and it shows that commitment to transparency and a genuine desire to help listeners make informed choices.

AI Podcast Host and Voices:

Right, he's not just saying you know, trust me, this will work. Right, he's showing you the data, the good and the bad.

AI Podcast Host and Voices:

The warts and the.

AI Podcast Host and Voices:

And letting you decide for yourself.

AI Podcast Host and Voices:

Yeah, it's like he's saying here's the roadmap.

AI Podcast Host and Voices:

Exactly.

AI Podcast Host and Voices:

Here are the potential pitfalls yeah. Now let's navigate this together.

Voices:

I like that.

AI Podcast Host and Voices:

And the fact that he's sharing all of this information for free on his website and his podcast is remarkable.

AI Podcast Host and Voices:

It is.

AI Podcast Host and Voices:

He's not trying to sell you anything Right. He's really just trying to give you the tools and the knowledge.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

To become a more confident investor.

AI Podcast Host and Voices:

A more empowered investor.

AI Podcast Host and Voices:

Yeah a more empowered investor. Exactly.

AI Podcast Host and Voices:

It's really a breath of fresh air. Yeah, in a world where everyone's always trying to sell you something, I know it really is it shows a genuine desire to educate and empower rather than just profit, you know.

AI Podcast Host and Voices:

Yeah, and as we've been talking, I've been thinking this isn't just about picking investments.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

It's about like adopting a mindset yeah, totally Like a whole way of thinking about your financial future.

AI Podcast Host and Voices:

It is. It's about shifting your perspective. Risk parity is more than just a set of rules or formulas. It's a philosophy, it's a way of thinking about your financial life, with intention, with knowledge and with a long-term view.

AI Podcast Host and Voices:

And that long-term view is so important. It is so. It's about becoming like a more thoughtful investor.

AI Podcast Host and Voices:

Exactly.

AI Podcast Host and Voices:

A more informed investor.

AI Podcast Host and Voices:

Right, not just blindly following the crowd or chasing the latest hot stock tip.

AI Podcast Host and Voices:

Yeah, exactly.

AI Podcast Host and Voices:

It's about taking ownership of your financial destiny. You're not just handing it over to someone else and hoping for the best.

AI Podcast Host and Voices:

Yeah, it's about becoming the captain of your own financial ship.

AI Podcast Host and Voices:

Yes, I love that analogy. It's like risk parity radio is giving you those navigational tools and those charts to help you steer your ship in the right direction.

AI Podcast Host and Voices:

In the right direction? Yeah, but even with the best tools, there are going to be challenges and uncertainty along the way. Right, of course. Investing is a journey it is. It's not a destination.

AI Podcast Host and Voices:

Not a destination.

AI Podcast Host and Voices:

There will be ups and downs.

AI Podcast Host and Voices:

There will Market swings, yep.

AI Podcast Host and Voices:

Unexpected events? Absolutely, but the key is to have a solid plan, a well-diversified portfolio and the knowledge to adapt to those changing conditions.

AI Podcast Host and Voices:

I think that's where the real value of risk parity radio lies. It's not just about giving you specific recommendations. It's about equipping you with the knowledge and the mindset to navigate the complexities of the market and make those smart decisions.

AI Podcast Host and Voices:

Yeah, those informed decisions.

AI Podcast Host and Voices:

That really align with your own needs and goals.

AI Podcast Host and Voices:

It's about becoming a more confident and empowered investor, exact, capable of weathering the storms and charting your own course towards financial well-being. Well said. But before we wrap up there's one question that's been kind of lingering in my mind. We've talked a lot about the what of risk parity radio.

Voices:

Right.

AI Podcast Host and Voices:

The portfolios, the strategies, the concepts? Yeah, but what about the WHY?

Voices:

Okay.

AI Podcast Host and Voices:

Why should someone invest their time and energy in learning about this approach? What are those potential benefits that go beyond just building that resilient portfolio?

AI Podcast Host and Voices:

That's a great question, and I think it really gets at why this whole concept of risk parity radio has resonated with so many people. It's not just about the mechanics of investing. It's something bigger than that. For me, the WHY of risk parity is all about peace of mind Okay, when it comes to your finances, right, knowing that you've built a portfolio that's designed to weather those inevitable ups and downs that the market throws at you.

AI Podcast Host and Voices:

So it's about taking control Exactly and reducing anxiety.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

Especially if you're relying on those investments for income and retirement or for other long-term goals.

AI Podcast Host and Voices:

It's about that confidence that you've got a plan in place, that you're not just at the mercy. Oh, right.

AI Podcast Host and Voices:

Exactly as we've been talking, I've been thinking about how this approach contrasts with the advice you typically hear, yeah, from like financial gurus and experts. You know buy low, sell high Time the market Pick the winning stocks.

AI Podcast Host and Voices:

Yeah, all that stuff.

AI Podcast Host and Voices:

It's almost like risk parity is like a rejection of that whole mindset.

AI Podcast Host and Voices:

It is. In a way, it's about recognizing that trying to outsmart the market is impossible. Yeah, instead, you have to accept that risk is a part of investing and manage that risk strategically.

AI Podcast Host and Voices:

So it's not about beating the market Right. It's about building a portfolio that can perform well, exactly Regardless of what the market does, yeah, and that can be really empowering, I think.

AI Podcast Host and Voices:

It is.

AI Podcast Host and Voices:

For those individual investors.

AI Podcast Host and Voices:

Yeah, it takes the pressure off of trying to pick the right stock or time the market perfectly.

Voices:

Yeah.

AI Podcast Host and Voices:

Instead, you're focused on building that solid foundation that portfolio that's built for the long term.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

Not just the quick wins.

AI Podcast Host and Voices:

Right, and that, I think, is what makes risk parity so compelling. It is it shifts that focus from speculation to strategy. Exactly, it's about making thoughtful decisions based on historical data, sound principles.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

And understanding your own risk tolerance.

AI Podcast Host and Voices:

Well said.

AI Podcast Host and Voices:

I'm really impressed by what I've learned about risk parity radio. Yeah, me too. It's clear that this podcast offers so much valuable information. It does, and insights for anyone who's serious about taking control of their financial future.

AI Podcast Host and Voices:

I agree, and I think the key takeaway for our listeners is that this is just the beginning, you know. Yeah. There's so much more to explore and learn and apply. It's a journey, it is.

AI Podcast Host and Voices:

And Risk. Parity Radio gives you that roadmap. It does. So, for our listener who's now intrigued by this whole idea of risk parity, what would you recommend?

AI Podcast Host and Voices:

Well, I would say, dive into the Risk Parity Radio website it's wwwriskparityradiocom and explore the resources they have there, listen to the podcast, look at the portfolio data and, most importantly, engage with that community. Yeah, ask questions, share your thoughts.

Mostly Uncle Frank:

Yeah.

AI Podcast Host and Voices:

And don't be afraid to challenge those conventional ideas, you know.

Voices:

Right.

AI Podcast Host and Voices:

The best investors are always learning.

AI Podcast Host and Voices:

Excellent advice.

AI Podcast Host and Voices:

Thank you.

AI Podcast Host and Voices:

And who knows, maybe our listener will be sharing their own risk parity insights on the podcast someday.

AI Podcast Host and Voices:

That would be great.

AI Podcast Host and Voices:

Inspiring others to take control of their financial lives. I love that and until then, happy investing everyone.

AI Podcast Host and Voices:

Happy investing.

AI Podcast Host and Voices:

Remember knowledge is power and risk parity. Radio is a great source of both.

AI Podcast Host and Voices:

Couldn't agree more.

AI Podcast Host and Voices:

And of course, we're always here for another deep dive. Yeah.

Mostly Uncle Frank:

Ready to explore whatever topic you throw our way next time Looking forward to it.

AI Podcast Host and Voices:

Yeah, second off, second off. We have episode three, all right. So today we're going to be diving into something I think is pretty important to well everyone, right Managing money, making smart choices with our finances. And you know you sent over some really interesting material for this deep dive, blending, like ancient wisdom, talmud and all that with modern financial research. I got to say I'm intrigued.

AI Podcast Host and Voices:

Yeah, it's kind of. It's kind of an unexpected pairing, Right, but what we're going to find is that there's this piece of financial advice in the Talmud, which you know is over 1500 years old, that it actually aligns with some pretty sophisticated modern day investment strategies.

AI Podcast Host and Voices:

Wow, okay, that's pretty wild. What exactly do the Talmud say about you know, managing money?

AI Podcast Host and Voices:

Well, there's this passage in Bava, metzia 42a, and it basically it advises a wise person to divide their wealth into three parts land, business and at hand.

AI Podcast Host and Voices:

Hold on a second. This advice is from a time way before we had stocks, bonds, even paper money. I mean, what did land and business even mean back then?

AI Podcast Host and Voices:

Right, right, it's fascinating, isn't it? Land in those days would have been pretty much the equivalent of real estate today. Right, I mean, you could even kind of stretch that to include modern investments like REITs. You know, even kind of stretch that to include modern investments like REITs? You know, those companies that own and manage properties.

AI Podcast Host and Voices:

Okay, yeah, I see the connection there, but what about business? That seems I don't know pretty broad.

AI Podcast Host and Voices:

It is. Yeah, it is broad, and that's where things get kind of interesting. You know, think of business in today's world as well representing stocks, maybe even owning a private company, or even investing in, like venture capital or something like that.

AI Podcast Host and Voices:

So that leaves us with at hand. Does that mean, like you know, stuffing gold coins under your mattress?

AI Podcast Host and Voices:

Well, not quite, although you know, back then it probably did involve, you know, precious metals. But today, think of at hand, as you know, cash, or you know money market funds, short term bonds, that kind of thing, anything that you can access easily. But here's what's really fascinating, right, even with this, like really simple language, the Talmud is it's basically tapping into this core principle of diversification.

AI Podcast Host and Voices:

Diversification yeah, that's definitely a buzzword in finance, right, but I think a lot of people they hear it but they don't really fully grasp what it means practically. Can you kind of break that down?

AI Podcast Host and Voices:

Absolutely Diversification. It basically means not putting all your eggs in one basket right. By spreading your investments across different asset classes like we were just talking about real estate stocks, cash you're essentially reducing your risk. If one area of the market takes a hit, well, your entire portfolio isn't going to be wiped out.

AI Podcast Host and Voices:

So the Talmud, even 1,500 years ago, was promoting a strategy that's still considered wise today.

AI Podcast Host and Voices:

It really does. It highlights how some financial wisdom is just it's timelessava Metzia. That kind of leaves me scratching my head a little.

AI Podcast Host and Voices:

Rabbi Shmuel recommends get this burying coins in the ground to keep them safe.

AI Podcast Host and Voices:

I mean, I can't imagine anyone doing that today, right, yeah, it does seem a bit I don't know a bit outdated now, doesn't it? But think about the historical context for a second. You know, back then there weren't any secure banking systems like we have now, so burying valuables, it was actually a pretty common way to protect yourself against against that.

AI Podcast Host and Voices:

That was kind of their version of a high security vault.

AI Podcast Host and Voices:

Exactly. And while the method itself, you know, might seem well pretty outdated, the underlying concern about security is still incredibly relevant today, you know. Think about cybercrime, digital fraud, all of that. It's a good reminder that, even though the tools and technology, you know, they change safeguarding our assets.

AI Podcast Host and Voices:

It's a constant challenge. That's a really good point. So I guess we're ready to fast forward a few centuries. Right Dive into modern portfolio theory.

AI Podcast Host and Voices:

Yeah, let's time travel. We're going to the 1950s, where Harry Markowitz, he developed what we now know as modern portfolio theory. Yeah, let's let's time travel. We're going to the 1950s, where Harry Markowitz, uh, he developed what we now know as a modern portfolio theory, or MPT for short.

AI Podcast Host and Voices:

Okay, so this is where things might get a little uh, you know more complex. How do we make sure we don't lose uh, lose our listener with? You know all the financial jargon.

AI Podcast Host and Voices:

Don't worry, I'll keep it clear. So the the core concept of MPT is it's all about finding the optimal mix of assets right to achieve the highest possible return for a given level of risk. Think of it like I don't know like baking a cake, you need the right balance of ingredients right to create the perfect taste and texture.

AI Podcast Host and Voices:

Okay, I'm with you so far, but how do you actually, you know, determine that perfect mix For investments? I mean.

AI Podcast Host and Voices:

That's where math and statistics come in MPT. It takes into account factors like historical performance of different assets, how volatile they are and how they correlate with each other, and this all helps create a visual representation called the efficient frontier.

AI Podcast Host and Voices:

Efficient frontier. That sounds pretty intimidating. Can you break that down a little visually?

AI Podcast Host and Voices:

I mean, so imagine a graph right where one axis represents risk and the other represents return. The Efficient Frontier is basically it's a curve on this graph. It shows all the portfolios, all the different combinations of investments that offer the highest possible return for each level of risk.

AI Podcast Host and Voices:

So if my portfolio is below that curve, that means I'm not really getting the most bang for my buck.

AI Podcast Host and Voices:

You got it Anything below the efficient frontier, it's considered inefficient right, because you could be getting more return for the same level of risk or you could be taking on less risk for the same return.

AI Podcast Host and Voices:

So the sufficient frontier, it's kind of like. It's like a roadmap to making your money work smarter, not harder.

AI Podcast Host and Voices:

Exactly, and here's the really cool part, right, Even though MPT it uses all these like really complex equations and stuff, it actually circles back to the same idea that we saw in the Talmud diversification. It's all about you know, spreading your investments wisely to manage risk and hopefully boost your returns.

AI Podcast Host and Voices:

It's really amazing how these ideas, separated by you know centuries, they still arrive at the same fundamental principle. So how did this theory kind of evolve? What happened next in our financial journey?

AI Podcast Host and Voices:

Well, MPT. It gave rise to what became known as the 60-40 portfolio, this strategy. It became like a benchmark, especially for long term investing and retirement planning, and all that.

AI Podcast Host and Voices:

OK, 60-40 portfolio. So that's the 60 percent stocks, 40 percent bonds, right. Why did this specific allocation become so popular?

AI Podcast Host and Voices:

That's a good question. Stocks historically they've offered a higher growth potential over the long term. But they also come with well, they come with higher risk right their value. It can fluctuate pretty dramatically in the short term. Bonds, on the other hand, they're generally more stable. They offer lower returns but with less risk. So the 60-40 split. It was seen as a good balance, especially for investors with a longer time horizon, like those saving for retirement.

AI Podcast Host and Voices:

It's kind of like finding that sweet spot between playing it safe and reaching for those higher returns. But what about when both stocks and bonds are struggling? Didn't that happen? Wasn't that in the 1970s? Does the 60-40 portfolio, does it hold up in those kind of situations?

AI Podcast Host and Voices:

You're right, the 1970s. They were a pretty turbulent time for the market and the traditional 60-40 portfolio. It didn't perform as well as people expected and that's where things start to get even more interesting. The limitations of the 60-40, it kind of led to some innovative outside-the-box thinking about asset allocation.

AI Podcast Host and Voices:

This is where we start to see some alternative approaches. Right, who stepped up to offer a different perspective?

AI Podcast Host and Voices:

Well, that would be Harry Brown, a financial thinker who wasn't afraid to kind of challenge the status quo. In 1977, he introduced something called the permanent portfolio, and it's a fascinating approach that actually echoes some of the ideas from the Talmud. Remember how the Talmud talked about dividing wealth into three parts? Well, brown, he kind of expanded on that right and incorporating four key asset classes.

AI Podcast Host and Voices:

Okay, I'm intrigued. What are the four pillars of this permanent portfolio?

AI Podcast Host and Voices:

It's divided equally 25% stocks, 25% long-term treasury bonds, 25% gold and 25% cash or money market funds.

AI Podcast Host and Voices:

Wow, that's a pretty diverse mix. What was the rationale behind those choices?

AI Podcast Host and Voices:

Brown was all about preparing for different economic scenarios, kind of like a chess player, you know, thinking several moves ahead. He designed each asset class to perform well in a specific economic environment.

AI Podcast Host and Voices:

So it's like having a financial toolkit right ready for anything the market throws at you.

AI Podcast Host and Voices:

Exactly. He saw stocks as a good bet during times of prosperity, economic growth, right Right, While long-term treasury bonds he thought those were meant to thrive during deflation.

AI Podcast Host and Voices:

And what about gold? Wasn't gold a strong performer back in the 1970s? You know that period that really kind of challenged the traditional 60-40 portfolio.

AI Podcast Host and Voices:

You're right, brown. He believed that gold was a hedge against inflation, which was a big concern back then. And finally, cash. Well, cash is king, right when nothing else seems to be working. It provides flexibility and stability during those uncertain times.

AI Podcast Host and Voices:

So each asset class kind of has its own superpower right, ready to activate when the economic conditions call for it. But I have a feeling there's more to this story. Did Brown's permanent portfolio? Did it stand the test of time?

AI Podcast Host and Voices:

Well, while it was a really brilliant step forward, like any pioneering concept, it did have its limitations. But that's a conversation for part two of our deep dive.

AI Podcast Host and Voices:

Can't wait to hear about those limitations and what happened next in this financial saga. Stay tuned, listeners. Things are about to get even more interesting. So last time we were talking about this permanent portfolio, right, get even more interesting. So last time we were talking about this permanent portfolio, right, the one Harry Brown came up with, designed to kind of handle any kind of economic storm.

AI Podcast Host and Voices:

But you mentioned it had some limitations. What were those? Yeah, you're right, no investment strategy is going to be perfect. One of the issues with Brown's approach was the way the assets were divided. Remember it was 25%, 25%, 25%, 25%, Stocks, bonds, gold and cash.

AI Podcast Host and Voices:

Right, yeah, it seemed pretty straightforward. What was the problem with that?

AI Podcast Host and Voices:

Well, you see each asset class, they have different levels of volatility. How much their value goes up and down.

AI Podcast Host and Voices:

So, even though the portfolio was diversified, some parts were inherently riskier.

AI Podcast Host and Voices:

Exactly Like gold. For example, Gold can be really volatile. The price can swing wildly and since Brown's portfolio it gave like equal weight to gold and bonds, which are usually more stable, the whole portfolio could be more sensitive to those gold fluctuations.

AI Podcast Host and Voices:

So it's kind of like putting together a team of superheroes, but one of them has a really unpredictable streak.

AI Podcast Host and Voices:

I like that. That's a great analogy. Another limitation was that Brown's approach. It didn't always take into account how complex economic conditions really are.

AI Podcast Host and Voices:

What do you mean by that? Can you give me an example?

AI Podcast Host and Voices:

Sure. So Brown, he considered gold to be like the hedge against inflation. Right, but history shows us that gold it doesn't always act the way you'd expect when prices are going up.

AI Podcast Host and Voices:

So it's not a guaranteed inflation buster.

AI Podcast Host and Voices:

Not necessarily. There have been times when inflation was high and stocks actually did better than gold. It all depends on the specific things happening in the economy.

AI Podcast Host and Voices:

It sounds like Brown was on the right track with diversification, but his formula it needed a little tweaking right to address those issues.

AI Podcast Host and Voices:

Exactly. And that's where things get even more interesting. Those limitations. They sparked a whole new wave of innovation in asset allocation. Remember how, brown he was trying to predict the future of the economy to position, the portfolio.

AI Podcast Host and Voices:

Yeah, he was trying to figure out which economic scenario was going to happen and then invest accordingly.

AI Podcast Host and Voices:

Right. Well, the next evolution it gets even more sophisticated. In the 1990s, an approach called risk parity came about.

AI Podcast Host and Voices:

Risk parity. That sounds pretty intense. I'm guessing this strategy. It has a different way of allocating assets, right? What's the main idea behind it?

AI Podcast Host and Voices:

Okay. So imagine you're building a house. You wouldn't want one wall to be super strong while the other walls are weak, right? You'd want the whole structure to be balanced, sturdy.

AI Podcast Host and Voices:

Right, Otherwise the whole thing could collapse if there's too much pressure.

AI Podcast Host and Voices:

That's exactly the idea behind risk parity. Instead of just dividing up assets by percentages or economic predictions, it tries to balance the risk contribution of each asset class risk contribution of each asset class.

AI Podcast Host and Voices:

So it's not just about how much you invent in something, but also how much risk that investment brings to the whole portfolio.

AI Podcast Host and Voices:

Exactly the goal is to create a portfolio where each asset class contributes roughly the same amount of risk. That way, no single investment has a huge impact on how the overall portfolio performs.

AI Podcast Host and Voices:

It's like a really carefully planned dance, right with each asset class moving together to create a balanced and harmonious portfolio.

AI Podcast Host and Voices:

That's a great image, and here's where it gets even more interesting Risk parity. It often uses something called leverage.

AI Podcast Host and Voices:

Leverage Now, that's a word that can make some investors pretty nervous. Can you explain what that means in this context?

AI Podcast Host and Voices:

Sure. So leverage is basically it's using borrowed money to potentially increase your returns. It's kind of like using a lever to lift a heavy object. You can move more weight with less effort.

AI Podcast Host and Voices:

But I imagine there's there's a tradeoff right More potential for reward, but also more more potential for risk. You got it.

AI Podcast Host and Voices:

Leverage, it magnifies both gains and losses. So while it can potentially boost your returns in a in a risk parity portfolio, it also requires you know careful, careful management and a deep understanding of the risks involved.

AI Podcast Host and Voices:

So this isn't really a strategy for someone who's just starting out with investing.

AI Podcast Host and Voices:

Definitely not Risk parity, with its focus on balancing risk and using leverage. It's a complex approach, often used by institutional investors and hedge funds, but for everyday investors, the key takeaway here is it's the importance of understanding and managing risk.

AI Podcast Host and Voices:

Okay, that makes sense. As we've gone through financial history, it seems like a few key themes keep coming up.

AI Podcast Host and Voices:

What themes are you thinking of?

AI Podcast Host and Voices:

Well, the importance of diversification, understanding your own personal risk tolerance and being prepared to adapt as economic conditions change. Whether we're talking about the ancient Talmud, modern portfolio theory or these more sophisticated strategies like risk parity, those principles seem to be like the foundation of smart wealth allocation.

AI Podcast Host and Voices:

You're absolutely right. And speaking of changing economic conditions, are you ready to explore how these ideas apply in today's market?

AI Podcast Host and Voices:

Yeah, definitely. It feels like the financial landscape right now is anything but calm. It'd be great to get your take on what investors should be thinking about in this current environment.

AI Podcast Host and Voices:

All right, let's shift gears and talk about the challenges and opportunities facing investors today.

AI Podcast Host and Voices:

So we've talked about a lot, right from, like, ancient wisdom to these really complex modern investing strategies. It's really fascinating stuff. But I think our listeners are probably wondering like how does all this, how does it apply to my money right now?

AI Podcast Host and Voices:

Right yeah, that's the big question, isn't it? And, honestly, the economic climate right now. Right yeah, that's the big question, isn't it? And, honestly, the economic climate right now. It's pretty wild out there.

AI Podcast Host and Voices:

Yeah, I mean it feels like, you know, one minute the market's calm, the next it's like a total roller coaster. We've got, you know, inflation going up, interest rates, geopolitical stuff. You know it can feel kind of overwhelming to even even, like, think about investing.

AI Podcast Host and Voices:

You're not wrong. There's a. There's a lot to think about these days. I think the biggest challenge for most people is just it's that feeling of uncertainty. Like you know, it's hard to predict what's going to happen next which makes it really hard to know how to how to position your portfolio.

AI Podcast Host and Voices:

It's like. It's like trying to hit a moving target right in a dark room. So how do we deal with all this uncertainty without making rash decisions?

AI Podcast Host and Voices:

Well, I definitely wouldn't recommend throwing darts at a stock board or anything. The key is to have a solid financial plan right, Knowing your goals, what you're comfortable with in terms of risk and your time horizon. That can really help you stay grounded when things get crazy in the market.

AI Podcast Host and Voices:

So it's like having a roadmap and a compass right Even when the path gets a little rough.

AI Podcast Host and Voices:

Exactly, A good plan helps you stay on course even when things get bumpy. And the other really important thing is to remember those timeless principles we've been talking about right Diversification, managing, managing risk and and staying informed.

AI Podcast Host and Voices:

But diversification, I mean it probably looks a lot different today than it did, you know, back in like Talmudic times, right? It's not just about land and businesses and cash anymore.

AI Podcast Host and Voices:

You're absolutely right. Today's investors, they've got a much wider range of things to choose from. You know. You've got real estate commodities, private equity, even digital assets like cryptocurrencies.

AI Podcast Host and Voices:

Wow, it's like the investment menu is just totally exploded. But that also makes things more complicated, doesn't it?

AI Podcast Host and Voices:

It does, yeah, and that's why it's more important now than ever to have a really clear understanding of your own personal financial goals, how much risk you're comfortable with all of that. There are so many options out there and finding that right mix, the one that really aligns with your specific needs, that can be a real challenge. And remember investing it's a marathon, not a sprint right. The important thing is to stay informed, stay diversified and stay focused on your long-term goals. Don't let those to modern portfolio theory and everything in between.

AI Podcast Host and Voices:

But if there's one thing I hope our listeners take away from this deep dive, it's that timeless truth, Smart investing. It's about understanding the principles, adapting to those changing conditions and having a plan.

AI Podcast Host and Voices:

Well said.

AI Podcast Host and Voices:

Thanks for joining us on this deep dive. Until next time, everyone happy investing.

Mostly Uncle Frank:

Next off we have episode five.

AI Podcast Host and Voices:

Welcome back everybody. Today we're going to be taking a deep dive into risk parity.

AI Podcast Host and Voices:

Okay, sounds good.

AI Podcast Host and Voices:

So you know, you always hear people talking about this traditional 60-40 portfolio.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

So 60% stocks, 40% bonds. But risk parity kind of flips that on its head and says, well, instead of looking at you know, the dollar amounts, what if we balanced it out based on the risk of each asset? And you know, instead of having stocks dominate the risk profile of your portfolio, you know each asset class would then be contributing equally to the overall risk.

AI Podcast Host and Voices:

And that's a really key distinction because, like you said, a traditional 60-40 portfolio sounds balanced on the surface, right, but in reality stocks are much more volatile.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

So your portfolio is really heavily exposed to stocks in that scenario.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

So risk parity tries to smooth that out.

AI Podcast Host and Voices:

Yeah, so OK, so we're aiming for equal risk contribution from each asset class, but how do we actually do that?

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

One of the sources that we're looking at today is the all weather strategy document from Bridgewater Associates, and they suggest using leverage to adjust the risk profile of different assets. I know leverage is a scary word for some investors.

AI Podcast Host and Voices:

Sure.

AI Podcast Host and Voices:

But stick with us here.

AI Podcast Host and Voices:

Leverage is actually a very simple concept when you boil it down, ok. So essentially, leverage magnifies both the potential gains and the potential losses.

Voices:

Right.

AI Podcast Host and Voices:

So you can use it to make a traditionally quote unquote safer asset like bonds.

Mostly Uncle Frank:

Yeah.

AI Podcast Host and Voices:

Behave more like a riskier asset, like stocks.

AI Podcast Host and Voices:

So the all-weather strategy document gives a pretty good example of that. It compares the historical performance of the S&P 500, a US 10-year bond and a leveraged US 10-year bond, and get this when leveraged appropriately, the bond actually achieved similar risk and return characteristics as the S&P 500.

AI Podcast Host and Voices:

Yeah, which I know that can seem counterintuitive at first, because you think of bonds as being low risk and stocks as being high risk, oh right, but by using leverage you can adjust those risk profiles to create a more balanced portfolio.

AI Podcast Host and Voices:

Now this brings up an interesting point that was mentioned in the CFA Institute chapter, and that's leverage aversion. So the idea is that the market might have an irrational fear of leverage, meaning that these safer leveraged assets could potentially be undervalued, Interesting and offer higher returns for, you know, savvy investors.

AI Podcast Host and Voices:

That's one theory, and it's an important one. Yeah, that raises a crucial question Is this aversion to leverage a genuine market inefficiency? Right. Or are there hidden risks? The market is pricing in. And I think this ties into a core belief of risk parity and that is focusing on the relationship of asset classes to the broader economic environment.

AI Podcast Host and Voices:

Okay. So instead of just looking at how assets correlate with each other, we're considering how they behave in different economic scenarios.

AI Podcast Host and Voices:

Exactly.

AI Podcast Host and Voices:

So Bridgewater identifies these four key environments rising growth, falling growth, rising inflation and falling inflation Right, and they designed their all-weather portfolio to hold up well in all those different climates.

AI Podcast Host and Voices:

That's right and if you look at the table that's provided in their document, it's quite encyclical. You can see how different asset classes tend to perform in each environment. Really highlights the importance of diversification.

AI Podcast Host and Voices:

Imagine you're building your own all-weather portfolio, just like Bridgewater did back in the day. They started with a simple program like Microsoft Excel to analyze these relationships, which I think to me that highlights the accessibility of risk parity principles.

Voices:

Yeah.

AI Podcast Host and Voices:

You don't need fancy algorithms or Wall Street connections.

Voices:

Right.

AI Podcast Host and Voices:

Really grasp the core concept here.

AI Podcast Host and Voices:

Exactly.

AI Podcast Host and Voices:

And remember, one of the key goals of risk parity is to achieve a higher Sharpe ratio.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

Now the Sharpe ratio measures risk-adjusted return. So a higher Sharpe ratio means you're getting more return for each unit of risk that you're taking.

AI Podcast Host and Voices:

That's right.

AI Podcast Host and Voices:

And the simulations that they showed in the all weather strategy document showed that their risk parity portfolio achieved a significantly higher Sharpe ratio compared to a conventional portfolio. Yes, and let's not forget the potential for reduced volatility.

AI Podcast Host and Voices:

Absolutely.

AI Podcast Host and Voices:

According to the Risk Parity Radio episode, for a given return target, a risk parity portfolio could be up to 60% less volatile than a traditional portfolio.

AI Podcast Host and Voices:

Yeah, that's huge.

AI Podcast Host and Voices:

Think about what that means for you.

Voices:

Yeah.

AI Podcast Host and Voices:

Potentially achieving similar returns with way fewer ups and downs. That smoother ride can make a big difference, especially for long-term investors that might get a little bit unnerved by big market swings. But it's important to remember that risk parity isn't a one-size-fits-all solution. There are actually different types of risk parity strategies out there. Some are more conservative, some are more aggressive.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

We'll get into all that a little bit later on. Sounds good. So we've established there are different flavors of risk parity out there, from conservative to aggressive.

Voices:

Right.

AI Podcast Host and Voices:

But before we dive into that, I want to circle back to Bridgewater and their all-weather approach, because it's really fascinating how they even arrived at this concept. Right, you know, their journey, as described in the all weather story, is just. It's a great example of how thinking outside the box can lead to these really innovative investment strategies.

AI Podcast Host and Voices:

Absolutely.

AI Podcast Host and Voices:

And it's really interesting because you know they weren't trying to, like predict the next hot stock or time the market perfectly or anything like that. They really started with this fundamental question of like you know what kind of portfolio would thrive in any economic environment, and that focus on resilience, on, you know, weathering any storm, I think is really what sets risk parity, apart from those traditional approaches.

AI Podcast Host and Voices:

I agree. It's about thriving, not just surviving.

AI Podcast Host and Voices:

Right, exactly, and so the Risk Parity Radio episode mentions that. You know it all started with a question from a pension fund manager about using long duration zero coupon bonds. Ok Now, at the time, most institutional portfolios were heavily tilted towards equities Right, which left them really vulnerable to these economic contractions, especially deflationary ones, like we saw during the Great Depression. And Bridgewater recognized that. They understood that equities perform poorly in certain economic conditions, so they were trying to find an asset class that would act as this counterbalance, something that would rise when equities fell, and they found that long duration bonds fit that bill perfectly.

Voices:

Yes.

AI Podcast Host and Voices:

And it's amazing to me, they were using just simple Microsoft Excel, a program that a lot of us probably use every day to analyze this concept. Right, you know, they created these four different portfolios, each designed to perform well in a specific economic environment. So you've got rising inflation, falling inflation, rising growth, falling growth. And by combining those, portfolios they created this diversified approach that wasn't reliant on accurately predicting which environment would prevail. It's like building a house with reinforcements for earthquakes and floods and hurricanes all at the same time.

AI Podcast Host and Voices:

I love that analogy.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

It's really good.

AI Podcast Host and Voices:

You're prepared for anything, even if you don't know what specific challenge might come your way.

AI Podcast Host and Voices:

That's right.

AI Podcast Host and Voices:

But even with this robust approach, Bridgewater still faced challenges. The all-weather story recounts how their depression gauge went haywire during the 2008 financial crisis.

AI Podcast Host and Voices:

That's right.

AI Podcast Host and Voices:

Now they had developed this depression gauge as like a warning system.

AI Podcast Host and Voices:

Yes.

AI Podcast Host and Voices:

It was supposed to signal when things were getting too risky, even for their you know balanced portfolio, like all weather Right. And so, when Lehman Brothers collapsed, the gauge sounded the alarm.

Voices:

Oh.

AI Podcast Host and Voices:

Signaling a very high probability of this you know depression-like scenario.

AI Podcast Host and Voices:

So what did they do?

AI Podcast Host and Voices:

So they essentially battened down the hatches, you know Right, and they took shelter in their safe portfolio.

Voices:

Okay.

AI Podcast Host and Voices:

And that portfolio was specifically designed to preserve capital during these extreme market turmoil.

AI Podcast Host and Voices:

So the safe portfolio was all about minimizing risk.

Voices:

Right.

AI Podcast Host and Voices:

So market risk, credit risk, counterparty risk, yep, while remaining neutral to both inflation and deflation? Exactly. And to achieve this they used a combination of hedged global government bonds, both nominal and inflation indexed. Okay, government bills and gold.

AI Podcast Host and Voices:

Wow. So they rode out the storm in their safe portfolio and then, gradually shifted back to the all weather mix as markets stabilized Right, and this just to me, you know this highlights the importance of adaptability. You know having a plan for different scenarios and knowing when to adjust your approach Exactly. But you know, reading about how they navigated that crisis, it almost felt like you know, their actions blowed the lines between risk parity and like macro hedge fund investing.

AI Podcast Host and Voices:

That's a really good observation.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

And I think you're right. The principles behind risk parity have definitely influenced the world of macro hedge funds Right, particularly the emphasis on economic environments and the use of leverage. Right and, as we mentioned before many risk parity strategies have actually become more dynamic over time, adapting to changing market conditions.

AI Podcast Host and Voices:

And that evolution has really led to a huge increase in the popularity of risk parity. The CFA Institute chapter points out that the number of firms offering risk parity products has exploded in recent years.

Voices:

Right.

AI Podcast Host and Voices:

And that assets under management using these strategies has grown considerably as well.

AI Podcast Host and Voices:

It's a testament to the growing acceptance of risk parity's potential benefits Right. But this rapid growth has also resulted in a wide range of products with varying approaches Right. Some are more conservative.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

Some are more aggressive.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

So it's not a monolithic concept anymore.

AI Podcast Host and Voices:

Yeah, the Risk Parity Radio episode highlights that diversity of approaches and Exhibit 4.13 in the CFA Institute chapter really drives that point home. Yeah. It compares the returns of various risk parity products over a three-year period and the differences are stark, yeah, so it's clear that not all risk parity products are created equal Exactly stark. So it's clear that not all risk parity products are created equal, and understanding the specific approach and risk level of any product that you're considering is absolutely crucial.

AI Podcast Host and Voices:

It is. You know, risk parity is more of a framework than a rigid formula, right. Different managers can implement it in very different ways, right, which is why due diligence is paramount.

Voices:

Right.

AI Podcast Host and Voices:

When selecting a risk parity strategy. Yeah, you need to understand the manager's investment process, their risk management framework, their track record.

AI Podcast Host and Voices:

It's about aligning yourself with a manager whose philosophy and approach resonates with your own investment beliefs and risk tolerance.

AI Podcast Host and Voices:

Exactly.

AI Podcast Host and Voices:

But even with all this surge in popularity, risk parity isn't without its critics Right, particularly when it comes to the use of leverage. The CFA Institute chapter addresses this concern directly.

Mostly Uncle Frank:

Yeah.

AI Podcast Host and Voices:

You know, highlighting the potential risks associated with leverage, especially on fixed income, during periods of rising interest rates.

AI Podcast Host and Voices:

Yeah, leverage by its very nature amplifies both gains and losses.

AI Podcast Host and Voices:

Right, and we've seen real world examples of this play out.

AI Podcast Host and Voices:

We have.

AI Podcast Host and Voices:

Remember the San Diego County Employees Retirement Association, or SDCRA. I do they adopted this risk parity approach, right, but ultimately they abandoned it after underperforming during a bull market, right. So this kind of leaves us with this big question is risk parity a miracle solution? Right, a step too far.

AI Podcast Host and Voices:

Or something in between. Or something in between, yeah, yeah.

AI Podcast Host and Voices:

There's no easy answer.

AI Podcast Host and Voices:

No.

AI Podcast Host and Voices:

The performance of risk parity can be heavily influenced by, you know, factors like interest rates and the overall economic environment. Sure, you know. Having delved into all this research, I'm kind of leaning towards the idea that risk parity is more of a philosophy than a specific strategy. I agree, it's just a different way of thinking about portfolio construction.

AI Podcast Host and Voices:

That's right One that emphasizes diversification and balance above all else.

AI Podcast Host and Voices:

And it challenges conventional wisdom about asset allocation. Right Encourages investors to look beyond traditional approaches.

AI Podcast Host and Voices:

And while leverage is a key element of risk parity, it's also the source of much debate and requires careful consideration it does. The Risk Parity Radio episode brought up this really interesting statistic that the overall performance of a portfolio is about 94% determined by the overall macro asset mix, which is just a powerful reminder that asset allocation is king. Yes, it is About 94% determined by the overall macro asset mix, which is just a powerful reminder that asset allocation

AI Podcast Host and Voices:

is king. Yes, it is, and risk parity offers a unique and potentially very effective approach to building that truly diversified portfolio.

AI Podcast Host and Voices:

I think so too.

AI Podcast Host and Voices:

Okay, so we've explored the philosophy behind risk parity. You know some of the potential advantages and some of the key considerations. Right Now, let's get practical. Okay, how do you actually implement a risk parity strategy?

AI Podcast Host and Voices:

Yeah, that's the question on everybody's mind, right? Well, the first decision point is how hands-on do you want to be?

AI Podcast Host and Voices:

Yeah, Do you want to build and manage your own risk parity portfolio?

Voices:

Right.

AI Podcast Host and Voices:

Or would you rather outsource it to a professional manager? Okay, so let's start with the DIY approach. Okay, so if you enjoy the challenge of investing and you have a pretty good grasp of the concepts that we've been discussing, building your own portfolio can be incredibly rewarding.

AI Podcast Host and Voices:

It can.

AI Podcast Host and Voices:

And you don't need any sophisticated software. Remember, bridgewater started with just simple Microsoft Excel, right. So that really speaks to the accessibility of this approach.

AI Podcast Host and Voices:

It does.

AI Podcast Host and Voices:

Okay, so for those who want to venture into, you know the DIY risk parity. What are some of the key steps involved?

AI Podcast Host and Voices:

Okay, so first you need to select your asset classes Right. Most risk parity portfolios include a mix of stocks, bonds and commodities, but you can certainly incorporate other asset classes as well, like real estate or precious metals.

AI Podcast Host and Voices:

You know, the all-weather strategy document provides a really good framework for thinking about asset allocation. It groups asset classes based on their performance in those different economic environments, so it's a fantastic starting point for constructing your own portfolio.

AI Podcast Host and Voices:

It is.

AI Podcast Host and Voices:

The risk parity radio episode emphasized the importance of considering your safe withdrawal rate, especially if you're planning to live off your investments in retirement.

Voices:

Right.

AI Podcast Host and Voices:

A risk parity portfolio with lower volatility could potentially support a higher safe withdrawal rate compared to a traditional portfolio.

AI Podcast Host and Voices:

It could.

AI Podcast Host and Voices:

So that could give you more financial security during those retirement years. Now, once you've established your asset allocation, you're going to need to rebalance your portfolio regularly to maintain that desired risk profile. That's right, and this means buying or selling assets as their prices fluctuate to ensure that each asset class continues to contribute its intended share of risk.

AI Podcast Host and Voices:

Right, and that's where discipline really comes in. Yeah. Because it's easy to get emotional, you know, when markets are swinging wildly, oh yeah and deviate from your plan. But sticking to your rebalancing strategy is absolutely essential for long term success.

AI Podcast Host and Voices:

Absolutely Well, I think that about covers it.

AI Podcast Host and Voices:

Yeah, I think so.

AI Podcast Host and Voices:

A comprehensive overview of, you know, some of the practical considerations for implementing risk parity. We hope this deep dive is giving you the knowledge and the confidence to make those informed decisions.

AI Podcast Host and Voices:

I hope so too.

AI Podcast Host and Voices:

You know, risk parity, like any investment approach, has its nuances and considerations.

AI Podcast Host and Voices:

Of course.

AI Podcast Host and Voices:

It's not a one-size-fits-all solution.

AI Podcast Host and Voices:

No, it's not.

AI Podcast Host and Voices:

But by understanding the principles behind risk parity, the potential benefits and drawbacks, and the key factors for implementation, you can build a portfolio that truly aligns with your unique needs and aspirations.

AI Podcast Host and Voices:

Absolutely.

AI Podcast Host and Voices:

So keep learning, keep exploring and never stop challenging that conventional wisdom.

AI Podcast Host and Voices:

Words to live by. Who knows what innovative investment approaches the future holds, absolutely so keep learning, keep exploring and never stop challenging that conventional wisdom Words to live by who knows what innovative investment approaches the future holds yeah that's the exciting part the world of investing is always evolving.

AI Podcast Host and Voices:

Yeah, that's right, and we're thrilled to be your guides on this fascinating journey, me too. Thanks for joining us on this deep dive into risk parity yes thank you. We hope you found it valuable and insightful.

Mostly Uncle Frank:

Next off we have episode seven.

AI Podcast Host and Voices:

Welcome to the deep dive. Today, we're going to unpack something called risk parity portfolios. Okay. It's this way of investing that kind of shifts your focus from just returns to like really strategically managing risk.

Voices:

Yeah.

AI Podcast Host and Voices:

We've got a great YouTube video from Risk Parity Radio which explains it all and offers some practical tips, plus a summary document with some helpful links.

AI Podcast Host and Voices:

Great, so get ready to change how you.

AI Podcast Host and Voices:

Get ready to change how you think about building your portfolio.

AI Podcast Host and Voices:

Yeah for sure, okay, so let's dive right in with something that's been puzzling me.

AI Podcast Host and Voices:

Okay, change how you get ready to change how you think about building your portfolio. Yeah for sure. Okay, so let's dive right in with something that's been puzzling me. Okay, I've heard that these fancy professionally managed risk parity portfolios have a bit of a mixed track record. Some did amazingly well during market downturns like March 2020, only dropping 17 to 20 percent.

Voices:

Okay.

AI Podcast Host and Voices:

But others tanked over 40 percent. Yeah, why such a huge difference?

AI Podcast Host and Voices:

That's a great question.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

The Risk Parity Radio video touched on this too.

AI Podcast Host and Voices:

OK.

AI Podcast Host and Voices:

A lot of these professional strategies get super complicated. Oh really Like juggling 15, 20 different asset classes 15 to 20?. Yeah.

AI Podcast Host and Voices:

That's way more than I can handle.

AI Podcast Host and Voices:

Right, and it doesn't stop there.

AI Podcast Host and Voices:

Oh no.

AI Podcast Host and Voices:

They also get into these complicated derivatives like futures and options which can really backfire. Oh, Remember Wealthfront's risk parity product, Mm-hmm. They took a big hit in March 2020, apparently because of those kinds of strategies.

AI Podcast Host and Voices:

Oh, wow.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

So that's a relief.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

Our deep dive today focuses on the DIY approach.

AI Podcast Host and Voices:

Exactly.

AI Podcast Host and Voices:

Something that's actually understandable and manageable, right.

AI Podcast Host and Voices:

Absolutely. We're going to break down how to build a risk parity portfolio you can actually control Perfect.

AI Podcast Host and Voices:

Yeah Now. The video laid out three key principles for DIY risk parity.

Voices:

Okay.

AI Podcast Host and Voices:

Almost like a treasure map.

Voices:

Right.

AI Podcast Host and Voices:

The Holy Grail macro allocation, allocation and simplicity Right. Can you break those down for us?

AI Podcast Host and Voices:

Think of the Holy Grail principle, as Ray Dalio calls it, as the foundation of risk parity.

AI Podcast Host and Voices:

OK.

AI Podcast Host and Voices:

It's all about finding assets that zig when others zag, having low or even negative correlation. By combining those, you reduce your risk without necessarily sacrificing returns.

AI Podcast Host and Voices:

So instead of putting all our eggs in one basket, and hoping for the best. We're spreading them out strategically.

AI Podcast Host and Voices:

Exactly. And then there's the macro allocation principle.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

The idea here is that over 90% of your portfolio's performance. Wow comes down to how you spread your money across the major asset classes. Okay, it comes down to how you spread your money across the major asset classes. Okay, stocks, bonds, gold, things like that. Gotcha. Picking individual stocks matters less than getting this big picture right.

AI Podcast Host and Voices:

So it's like choosing the right recipe, then tweaking the seasonings later on.

AI Podcast Host and Voices:

That's a great way to put it.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

Finally, there's the simplicity principle.

AI Podcast Host and Voices:

Okay, as.

AI Podcast Host and Voices:

Rick Ferry said complexity is a cost. Simplicity is an alpha. Too much complexity leads to mistakes and makes it harder to manage your portfolio effectively.

AI Podcast Host and Voices:

For sure, keep it simple and avoid those impulsive decisions. Now you mentioned these uncorrelated assets. Where do we even find these magical investments?

AI Podcast Host and Voices:

We'll get into specifics later, but A good tool to start with is a correlation analyzer.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

There are free ones online, like the one on Portfolio Visualizer Awesome. You can compare different funds and see how their prices have historically moved in relation to each other.

AI Podcast Host and Voices:

And that's where we see those correlation coefficients right. Exactly those numbers from MITIC 1 to plus 1.

AI Podcast Host and Voices:

A correlation of plus 1 means two assets move perfectly in sync.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

Like a pair of synchronized swimmers.

AI Podcast Host and Voices:

Got it.

AI Podcast Host and Voices:

A correlation of zero means they move independently and minus one means they move in opposite directions. Okay, that's what we're aiming for finding those assets that will balance each other out.

AI Podcast Host and Voices:

So where do typical assets fall on that spectrum?

AI Podcast Host and Voices:

Well, think about stocks.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

Most stocks tend to be highly correlated. They move up and down together. Makes sense that spectrum. Well, think about stocks. Okay, most stocks tend to be highly correlated. They move up and down together.

AI Podcast Host and Voices:

Makes sense.

AI Podcast Host and Voices:

That makes sense, because they're all influenced by similar economic factors. Right. But then you have long-term treasury bonds Okay, they often have a negative correlation with stocks, which means when stocks go down, bonds might actually go up.

AI Podcast Host and Voices:

Interesting, so bonds act like a cushion when the stock market gets bumpy.

AI Podcast Host and Voices:

Precisely. Then you have gold and commodities which tend to be uncorrelated with both stocks and bonds. They're kind of the wild cards marching to the beat of their own drum, gotcha. Finally, you have things like REITs and preferred shares, which tend to be slightly correlated with stocks, offering some diversification, but not as much as those negatively correlated assets. Okay, I'm some diversification, but not as much as those negatively correlated assets.

AI Podcast Host and Voices:

Okay, I'm starting to see the bigger picture here. Yeah, but how do we actually start putting these pieces together?

AI Podcast Host and Voices:

A solid starting point is to build a foundation with those negatively correlated assets we talked about. Oh yeah, stocks and long-term treasury bonds. Right, they form the core of most risk parity portfolios. Uh-huh, balancing growth potential with stability.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

Think of stocks as the engine of your portfolio and bonds as the brakes.

AI Podcast Host and Voices:

Okay. Each playing a distinct role in managing risk. So we have our engine and our brakes. What else can we add to the mix?

AI Podcast Host and Voices:

You can then layer in those uncorrelated assets. Okay, like gold commodities, preferred shares, reits, even some cash or short-term bonds, in proportions that align with your risk tolerance and goals.

AI Podcast Host and Voices:

Gotcha.

AI Podcast Host and Voices:

The Risk Parity Radio video has some sample portfolios to get you started.

AI Podcast Host and Voices:

So, once we've got a portfolio structure in mind, what's the next step? It sounds like we need to take it for a test drive before putting real money down right.

AI Podcast Host and Voices:

Exactly, we have these great free online tools like Portfolio Charts oh cool. And Portfolio Visualizer.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

That lets you backtest your portfolio and even run Monte Carlo simulations.

AI Podcast Host and Voices:

So we can see how it would have performed in the past and under different market conditions. That's like a virtual crash test for our portfolio.

AI Podcast Host and Voices:

You got it and remember the most important metric for a retirement portfolio is the projected safe withdrawal rate.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

How much you can withdraw each year without running out of money.

AI Podcast Host and Voices:

Ah, that makes sense. I've heard about the 4% rule Right. Is that still relevant for these kinds of portfolios?

AI Podcast Host and Voices:

That's the traditional guideline for a standard stock and bond portfolio. But the beauty of risk parity is that it often leads to a much higher safe withdrawal rate, really Sometimes 5%, 6% or even more.

AI Podcast Host and Voices:

Wow, that could make a huge difference in retirement planning Huge. So instead of just assuming a 4% withdrawal rate, we could potentially retire earlier. Yeah. Or have more flexibility in our spending.

AI Podcast Host and Voices:

Exactly. It really changes the game and highlights how a strategic approach to risk can have a huge impact on your financial well-being.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

It's not just about returns.

Voices:

No.

AI Podcast Host and Voices:

It's about understanding how much risk you're comfortable with Right and building a portfolio that can weather those market storms.

AI Podcast Host and Voices:

This is making me rethink my own retirement plan.

AI Podcast Host and Voices:

I know it's exciting.

AI Podcast Host and Voices:

So what are some practical first steps for someone who wants to explore building their own risk parity portfolio?

AI Podcast Host and Voices:

We'll start by revisiting those three key principles we discussed.

AI Podcast Host and Voices:

OK.

AI Podcast Host and Voices:

The holy grail macro allocation and simplicity.

AI Podcast Host and Voices:

Right. Those are the foundation of our portfolio.

AI Podcast Host and Voices:

Exactly.

AI Podcast Host and Voices:

And then you mentioned those online tools portfolio visualizer and portfoliofolio Charts. Yeah, Are those good places to start experimenting.

AI Podcast Host and Voices:

Absolutely. They're treasure troves of information. Cool, and you can play around with different asset combinations and see how they behave. Awesome, it's like a virtual sandbox for portfolio building.

AI Podcast Host and Voices:

That sounds fun.

AI Podcast Host and Voices:

Yeah, it is.

AI Podcast Host and Voices:

So it seems like there's a lot of flexibility in this approach. It's not just a one size fits all solution, right?

AI Podcast Host and Voices:

Exactly. You can tailor it to your specific risk tolerance, financial goals and time horizon. Okay, there's no right or wrong answer. Okay, it's all about finding a balance that you're comfortable with. Gotcha, don't be afraid to experiment. Yeah, start with a simple portfolio, test it out using those online tools, see how it performs under different scenarios, and then adjust as needed. It's a journey of learning and fine tuning.

AI Podcast Host and Voices:

And those sample portfolios from the risk parity radio video can be really helpful as a starting point right.

AI Podcast Host and Voices:

They are a fantastic resource, showing that you don't need to reinvent the wheel. Right. You can learn from others who have paved the way reinvent the wheel Right.

AI Podcast Host and Voices:

You can learn from others who have paved the way. Now, speaking of those sample portfolios, you mentioned earlier that long-term treasury bonds play a key role in most of them. Yeah, I'm curious, why are they so important?

AI Podcast Host and Voices:

Well, remember we're looking for those negatively correlated assets. Right and long-term treasury bonds often fit the bill. They've historically moved in the opposite direction of stocks, which makes them incredibly valuable for smoothing out the bumps in the road.

AI Podcast Host and Voices:

So, even though they might not grow as fast as stocks, they're like shock absorbers for the portfolio.

AI Podcast Host and Voices:

Exactly. The video also points out that the exact mix of stocks and bonds will vary depending on your other assets and your risk tolerance. It's not always a simple 50-50 split.

AI Podcast Host and Voices:

That's important to remember. It's all about finding that sweet spot between risk and return that aligns with your personal circumstances.

AI Podcast Host and Voices:

The video also emphasized that, while professional risk parity portfolios can get incredibly complex, the DIY approach can be surprisingly simple. Yeah. You can often achieve it with just a handful of carefully selected ETFs.

AI Podcast Host and Voices:

That's good to know. It's reassuring to hear that you don't need to be a financial wizard to build a solid risk parity portfolio.

AI Podcast Host and Voices:

Nope, not at all.

AI Podcast Host and Voices:

So let's talk about some of those other asset classes that might find their way into the mix. Right, gold seems to be a popular one. Yeah, I'm curious what role does gold play in a risk parity portfolio?

AI Podcast Host and Voices:

Gold often gets included because it tends to be uncorrelated with both stocks and bonds. Ok, it's seen as a potential safe haven asset, something that can hold its value when the economy gets shaky.

AI Podcast Host and Voices:

So it's like having an insurance policy in your portfolio.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

Not necessarily for growth, but for protection.

AI Podcast Host and Voices:

That's a great analogy. It's not about getting rich quick with gold.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

It's about adding a layer of stability to the portfolio during turbulent times.

AI Podcast Host and Voices:

What about commodities? We haven't talked much about those.

AI Podcast Host and Voices:

Right. Well, the video mentioned commodities like oil, natural gas, agricultural products as potentially good additions to a risk parity portfolio. Ok, they also tend to have low or negative correlations with stocks and bonds Interesting and can act as an inflation hedge.

Mostly Uncle Frank:

OK.

AI Podcast Host and Voices:

Helping to protect your purchasing power when prices start rising.

AI Podcast Host and Voices:

So they're like a buffer against inflation.

AI Podcast Host and Voices:

Exactly.

AI Podcast Host and Voices:

I remember during the pandemic, commodities were one of the few things that held their value or even went up.

AI Podcast Host and Voices:

That's right. They can be a valuable tool for diversification, especially when inflation is a concern.

AI Podcast Host and Voices:

Now, something else that stood out to me in the video was the importance of regularly rebalancing the portfolio.

AI Podcast Host and Voices:

Yes.

AI Podcast Host and Voices:

Can you explain why that's so crucial for risk parity?

AI Podcast Host and Voices:

Rebalancing is essential for a couple of reasons.

Voices:

Okay.

AI Podcast Host and Voices:

First, it forces you to buy low and sell high.

Voices:

Okay.

AI Podcast Host and Voices:

When one asset class outperforms the others, its proportion within your portfolio naturally increases. Rebalancing means selling some of that overperforming asset and buying more of the underperforming ones.

AI Podcast Host and Voices:

So you're essentially locking in some profits from the winners and buying the relative bargains Exactly Makes sense. But what's the second reason?

AI Podcast Host and Voices:

The second reason is that rebalancing helps you maintain your desired risk level.

Voices:

Okay.

AI Podcast Host and Voices:

As asset prices go up and down, your portfolio's risk profile can drift away from your original target.

AI Podcast Host and Voices:

So if stocks have a great year, your portfolio might become unintentionally more aggressive than you planned.

AI Podcast Host and Voices:

Exactly Rebalancing brings it back into alignment with your risk tolerance.

AI Podcast Host and Voices:

Okay, the video mentioned that backtesting and Monte Carlo simulations can help you figure out how often to rebalance. Yeah, do you have any thoughts on that?

AI Podcast Host and Voices:

Those tools can be incredibly helpful in determining the optimal rebalancing frequency for your specific portfolio.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

Some portfolios may benefit from quarterly rebalancing, while others might be better off with an annual approach.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

It really depends on the assets you've chosen and how volatile they are.

AI Podcast Host and Voices:

So it's finding that sweet spot between not rebalancing too often and incurring extra trading costs, but also not letting your portfolio drift too far from its target.

AI Podcast Host and Voices:

Exactly. It's all about finding that balance between discipline and efficiency.

AI Podcast Host and Voices:

Now we've got our portfolio built and we're rebalancing it, what else should we be thinking about as we manage our risk parity portfolio over time?

AI Podcast Host and Voices:

One thing that always comes to mind for me is expenses.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

Every dollar we pay in fees eats into our returns.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

I'm assuming that's still something to watch out for, with risk parity right.

AI Podcast Host and Voices:

Absolutely. Expenses are a silent killer of returns.

AI Podcast Host and Voices:

Yes, they are.

AI Podcast Host and Voices:

When choosing ETFs or other investments for your portfolio, pay close attention to their expense ratios.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

The lower, the better.

AI Podcast Host and Voices:

But it's not just about finding the absolute lowest fees, is it?

AI Podcast Host and Voices:

Right. What about the quality of the fund?

AI Podcast Host and Voices:

You're right, it's not just about chasing the cheapest option.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

Sometimes paying a slightly higher expense ratio for a well-managed fund with a solid track record can be worth it in the long run.

AI Podcast Host and Voices:

That makes sense.

AI Podcast Host and Voices:

It's about finding the right balance between cost and quality.

Voices:

Right.

AI Podcast Host and Voices:

Getting the most value for your investment dollar. What about taxes?

AI Podcast Host and Voices:

Oh yeah.

AI Podcast Host and Voices:

Those can have a big impact on returns too, right.

AI Podcast Host and Voices:

They absolutely can. So should we be thinking about taxes when building and managing a risk parity portfolio?

AI Podcast Host and Voices:

Absolutely. Taxes can significantly impact your overall returns, so it's essential to consider tax efficiency when making investment decisions. Tax-advantaged accounts like IRAs and 401ks are great places to hold these investments.

AI Podcast Host and Voices:

And for investments held in regular taxable accounts.

AI Podcast Host and Voices:

Consider ETFs, known for their tax efficiency.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

They're structured to minimize taxable distributions. Okay, allowing you to keep more of your investment games.

AI Podcast Host and Voices:

So it's not just about picking the right investments Right. It's also about holding them in the right types of accounts to minimize taxes.

AI Podcast Host and Voices:

That's right. It's all about optimizing your portfolio from every angle.

AI Podcast Host and Voices:

Okay, so we've covered a lot of ground here.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

The principles of risk parity, the different asset classes, rebalancing and even tax efficiency.

AI Podcast Host and Voices:

I feel like I have a much better grasp on this approach now.

AI Podcast Host and Voices:

Me too, but it's a lot to take in.

AI Podcast Host and Voices:

It is.

AI Podcast Host and Voices:

It's reassuring to know that this is just the beginning of the journey. Yeah, and there's always more to learn.

AI Podcast Host and Voices:

Absolutely.

AI Podcast Host and Voices:

It is a lifelong journey of learning when it comes to investing.

AI Podcast Host and Voices:

It definitely is, and the more you understand, the better decisions you'll make to reach your financial goals, you know. Going back to the risk parity radio video, one of the things that really struck me was how this approach could completely change how we think about retirement planning.

AI Podcast Host and Voices:

Yes, that part was eye-opening. The video talked about how these portfolios, with their potential for higher safe withdrawal rates, could really shift our retirement timelines.

AI Podcast Host and Voices:

Yeah, for sure.

AI Podcast Host and Voices:

It made me wonder if, instead of relying on that traditional 4% rule, what could a 5-6% withdrawal rate, or even higher, mean for our listeners?

AI Podcast Host and Voices:

It's a huge difference. Think about it. Retiring earlier, having more financial freedom to travel or pursue hobbies, or just feeling more secure, knowing your savings can last longer, it changes the whole picture.

AI Podcast Host and Voices:

It's not just about numbers on a spreadsheet anymore. It's about the freedom to live the life you want.

AI Podcast Host and Voices:

Exactly.

AI Podcast Host and Voices:

It really highlights how powerful this concept of risk parity can be.

AI Podcast Host and Voices:

Absolutely. It's about being proactive.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

Understanding your options and choosing the approach that aligns with your goals and values.

AI Podcast Host and Voices:

Taking control of your financial future. Yes, so, as we wrap up our deep drive into risk parity portfolios, okay, what's the one big takeaway you hope our listeners will remember?

AI Podcast Host and Voices:

I hope they'll remember that investing isn't just about chasing returns.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

It's about managing risk by diversifying wisely. Okay, understanding how different assets relate to each other and focusing on the long term. Yeah. They can build a portfolio that can weather any market storm and help them achieve their financial dreams.

AI Podcast Host and Voices:

That's a great way to put it. And before we sign off, I want to leave our listeners with one final thought to consider. Okay, if risk parity can potentially boost those safe withdrawal rates so significantly, what could that mean for your retirement plan?

AI Podcast Host and Voices:

Oh yeah.

AI Podcast Host and Voices:

Could you retire earlier? Uh-huh, travel more.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

Finally pursue that passion project you've been dreaming of.

AI Podcast Host and Voices:

The possibilities are truly exciting, and that's the power of knowledge and informed decision making.

AI Podcast Host and Voices:

Thank you for joining us on this deep dive into risk parity portfolios. We hope you've gained some valuable insights and are feeling inspired to take control of your financial future.

AI Podcast Host and Voices:

It's been a pleasure exploring this topic with you.

AI Podcast Host and Voices:

Until next time, keep exploring, keep learning and keep diving deep.

Mostly Uncle Frank:

Last off. Last off, we have episode nine.

AI Podcast Host and Voices:

All right. So you guys have sent in a ton of stuff on preferred shares and you really want to know if they belong in your portfolio. Yeah, so we are going to dive deep and help you figure that out. Absolutely, they're this hybrid between a stock and a bond. Right and a lot of people are talking about the income potential.

AI Podcast Host and Voices:

Yeah, and that steady income stream is a big draw for a lot of people. But unlike bonds, they do have some price fluctuation. Yeah, you know, kind of similar to stocks, yeah. So that's the unique thing about them.

AI Podcast Host and Voices:

So, before we get into it, I just want to mention one funny thing from this YouTube source. Ok, have you heard of the Bangladesh butter indicator?

AI Podcast Host and Voices:

I have not.

AI Podcast Host and Voices:

No. So apparently there's this weird correlation between the price of butter in Bangladesh and the S&P 500. Wow, so I mean it's funny, but it also shows that correlation doesn't mean causation.

AI Podcast Host and Voices:

Right, exactly. We don't want to make investment decisions based on random connections.

AI Podcast Host and Voices:

Right, and there's a lot of noise out there.

AI Podcast Host and Voices:

There is.

AI Podcast Host and Voices:

So how do we avoid falling into those traps? You know bad advice.

AI Podcast Host and Voices:

Well, you're right, and that's why we need a good framework, right, and that's why we need a good framework Right and I think luckily we have one it's David Stein's 10 questions, and we're going to use these questions to really dissect this. Etf PFF Okay. Which is one way to invest in preferred shares.

AI Podcast Host and Voices:

So just to clarify, this framework can be used with any investment.

AI Podcast Host and Voices:

With any investment exactly. It's really helpful, Awesome yeah.

AI Podcast Host and Voices:

So one thing that this YouTube source mentioned was some bad investing strategies. Oh yeah. And that's stuff like you know, following hot stock tips or trying to time the market.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

Why is that so dangerous?

AI Podcast Host and Voices:

Well, I think a lot of it stems from emotional reactions. Yeah. And not really understanding the risks involved in market dynamics.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

So, for example, if a stock went up 20 percent last month, right involved in market dynamics. So, for example, if a stock went up 20% last month. That doesn't mean it's going to go up 20% this month. It's just not how it works.

AI Podcast Host and Voices:

What about taking advice from someone who isn't a fiduciary?

AI Podcast Host and Voices:

Oh, yeah, that's a red flag. You want to make sure that your advisor is a fiduciary that means that their interests are aligned with yours, and not an advisor who's just pushing products that benefit them.

AI Podcast Host and Voices:

Okay, so due diligence is key, absolutely. Let's pivot back to David Stein's 10 questions. So that's going to be our roadmap for evaluating PFF.

AI Podcast Host and Voices:

Exactly right and it really helps us to just take a step back, yeah, and approach this systematically and objectively. And the first question, kind of deceptively simple but so crucial is what is it?

AI Podcast Host and Voices:

Right, so we're looking at PFF, this ETF that's composed of preferred shares. But this YouTube source called preferred shares, this hybrid between stocks and bonds. I'm still not sure I understand what that actually means.

AI Podcast Host and Voices:

So they occupy that middle ground. So, just like bonds, they usually offer steady income through dividends. But like stocks, their prices can fluctuate and in a bankruptcy they would have a higher claim on assets than common stock, but lower than bonds.

AI Podcast Host and Voices:

Okay, I'm starting to get a clearer picture now. Good, question two is investment, speculation or gamble?

AI Podcast Host and Voices:

Yes.

AI Podcast Host and Voices:

So where does PFF fit in?

AI Podcast Host and Voices:

So, based on Stein's definitions, pff is squarely in the investment category. Okay, it generates income through dividends and historically has a positive expected return over the long term.

Voices:

Right.

AI Podcast Host and Voices:

So we're not timing the market, we're not buying lottery tickets, you know, hoping to hit the jackpot.

AI Podcast Host and Voices:

Right, so it's not gambling.

AI Podcast Host and Voices:

Not gambling.

AI Podcast Host and Voices:

Okay, that's reassuring. Now to the exciting part potential upside.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

What kind of returns can we expect with PFF?

AI Podcast Host and Voices:

So the primary upside of preferred shares, and thus PFF, lies in that consistent dividend income, and currently the yield is around 5.4% annually Wow, which is significantly higher than a lot of traditional bond options available right now. But this does change over time, of course, depending on interest rates and all these other things.

AI Podcast Host and Voices:

Okay, yeah, that high yield definitely grabs my attention.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

But of course, every investment has risks, of course. So question four is all about the downsides.

AI Podcast Host and Voices:

Yeah, what are those? So one major risk is interest rate sensitivity. So when interest rates rise, the value of fixed income investments, including preferred shares, tends to decrease.

AI Podcast Host and Voices:

Okay, so that's a risk with any fixed income product.

AI Podcast Host and Voices:

Right, exactly. So, that's something to keep in mind.

AI Podcast Host and Voices:

What other risks should we be aware of with preferred shares specifically?

AI Podcast Host and Voices:

Another one is company performance. So if a company that's issuing preferred shares experiences financial difficulties, they may reduce or even suspend dividend payments.

AI Podcast Host and Voices:

That makes sense.

AI Podcast Host and Voices:

However, PFF has over 500 different preferred shares.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

So we're not overly exposed to any single company's troubles.

AI Podcast Host and Voices:

That's a big advantage.

AI Podcast Host and Voices:

It is.

AI Podcast Host and Voices:

Okay. So question five is who's on the other side of the trade? What does that mean in terms of PFF?

AI Podcast Host and Voices:

So, essentially, who are the big players who are buying and selling these preferred shares?

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

And the YouTube source really highlights institutions like pension funds and insurance companies.

AI Podcast Host and Voices:

OK.

AI Podcast Host and Voices:

And they're looking for those steady income streams which makes this market fairly stable and liquid.

AI Podcast Host and Voices:

So it's not just individual investors? No, it's not All right. Question six focuses on the investment vehicle itself. Okay, so we know PFF is an ETF Right. What makes that good for the average investor? Think of an ETF like a basket of securities, in this case, preferred shares, so you can buy and sell it just like a stock on an exchange, but you get that diversification benefit.

AI Podcast Host and Voices:

Right. So in the case of PFF, you're getting exposure to over 500 preferred shares.

AI Podcast Host and Voices:

Right, exactly.

AI Podcast Host and Voices:

Which is great, because I don't have the time or expertise to research all the individual shares.

AI Podcast Host and Voices:

Exactly, and ETFs generally have very low expense ratios.

AI Podcast Host and Voices:

Oh, that's great yeah.

AI Podcast Host and Voices:

So EFF specifically has a 0.46% expense ratio.

AI Podcast Host and Voices:

So for every $100, only 46 cents goes to fees.

AI Podcast Host and Voices:

That's right.

AI Podcast Host and Voices:

That's incredibly cost effective.

AI Podcast Host and Voices:

It is.

AI Podcast Host and Voices:

Now question seven. What does it take to be successful with this investment? Is it a set it and forget it kind of thing?

AI Podcast Host and Voices:

It's pretty close to that. You buy the ETF, you collect dividends. Of course, it's wise to just monitor its performance periodically and rebalance your portfolio.

Voices:

Right.

AI Podcast Host and Voices:

But you're not going to be day trading or trying to time the market.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

With this investment.

AI Podcast Host and Voices:

So it's a long-term strategy.

AI Podcast Host and Voices:

Exactly, it is. Yeah, okay, question eight who's getting a cut? We talked about the low expense ratio, but are there any other hidden fees?

AI Podcast Host and Voices:

Besides the expense ratio, you might have trading commissions, depending on your brokerage, but a lot of brokerages offer commission-free trades on ETFs now.

AI Podcast Host and Voices:

Okay, so you might be able to dodge those fees altogether. You might be able to yeah, now question nine how does PFF impact your overall portfolio? This is an interesting one.

AI Podcast Host and Voices:

It is.

AI Podcast Host and Voices:

Especially when we're talking about diversification.

AI Podcast Host and Voices:

Right and I think the key here is understanding correlation.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

So, put simply, correlation is how different assets move in relation to each other.

AI Podcast Host and Voices:

So two assets with a high positive correlation. They tend to rise and fall together.

AI Podcast Host and Voices:

That's exactly right.

AI Podcast Host and Voices:

And then, if they have a low correlation or negative correlation, they move more independently, yes, okay. So now let's look at PFF. Okay, and how it correlates with different asset classes. Okay, and we'll use data from Portfolio Visualizer just to paint a clear picture of how PFF might behave in a portfolio. Sounds good, okay. So first stocks. I'm imagining it's pretty closely correlated, since it's equities.

AI Podcast Host and Voices:

So there is a positive correlation, but it's not as strong as you might think.

AI Podcast Host and Voices:

Oh, okay.

AI Podcast Host and Voices:

So PFF has a correlation of about 0.58 with the US total stock market.

Mostly Uncle Frank:

Okay.

AI Podcast Host and Voices:

So it's not going to mirror the stock markets every move.

AI Podcast Host and Voices:

So there's a degree of independence there.

AI Podcast Host and Voices:

There is some independence yeah.

AI Podcast Host and Voices:

So good for diversification.

AI Podcast Host and Voices:

Exactly yeah, Like a shock absorber for your portfolio.

AI Podcast Host and Voices:

Okay, that's really interesting. What about with bonds, specifically US treasuries? Yeah, those are considered a safe haven asset.

AI Podcast Host and Voices:

Right, those are considered a safe haven asset, right? So this is really interesting. The correlation between PFF and US treasuries is very close to zero, oh wow, which means it can offer diversification benefits even within the fixed income portion of your portfolio.

AI Podcast Host and Voices:

So, even if I hold bonds, adding PFF could make my portfolio more resilient. It could. Okay, let's compare it to REITs, another asset class known for income. Yeah, they're both popular for income focused investors.

AI Podcast Host and Voices:

All right. So both PFF and REITs are offering some pretty good yields right now, but PFF actually seems to have the edge, coming in at around 5.4 percent annually.

AI Podcast Host and Voices:

OK.

AI Podcast Host and Voices:

Whereas something like VNQ, which is a major REIT ETF, is sitting at about 3.88 percent.

AI Podcast Host and Voices:

OK.

AI Podcast Host and Voices:

And the correlation between PFF and REITs is about 0.56.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

So there's some overlap, but also some room for diversification.

AI Podcast Host and Voices:

So if I'm primarily seeking higher income with potentially less volatility, PFF might be better than REITs.

AI Podcast Host and Voices:

Potentially yes.

AI Podcast Host and Voices:

Okay, what about dividend paying stock funds? Those are really popular, but I'm guessing those are more closely tied to the stock market's performance.

AI Podcast Host and Voices:

Yeah, absolutely so. For example, Vanguard's high dividend yield ETF VYM has a correlation of over 90% with the total stock market. Wow, and their current yield is only around 3.6%.

AI Podcast Host and Voices:

So significantly lower than PFF.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

And once again it seems like PFF offers that better balance of income and diversification. Right, okay, one last comparison how does PFF stack up against corporate bonds, another fixed income option.

AI Podcast Host and Voices:

So corporate bonds are yielding somewhere in the 3% to 3.5% range right now.

AI Podcast Host and Voices:

Lower than PFF.

AI Podcast Host and Voices:

Which is lower than PFF, and, interestingly, their correlation to the stock market is very similar to PFFs. Okay, so somewhere between like 0.5 and 0.6. Stock market is very similar to PFFs, okay.

AI Podcast Host and Voices:

So somewhere between like 0.5 and 0.6. So it seems like PFF might be a more compelling choice than corporate bonds too.

AI Podcast Host and Voices:

It could be yeah.

AI Podcast Host and Voices:

Higher yield comparable diversification benefits. Yeah, okay, so question 10, the ultimate question.

AI Podcast Host and Voices:

Yeah, the one that matters.

AI Podcast Host and Voices:

Should you invest in PFF?

AI Podcast Host and Voices:

That's the question.

AI Podcast Host and Voices:

And I'm guessing there's no easy answer.

AI Podcast Host and Voices:

There's no easy answer.

AI Podcast Host and Voices:

It depends on individual circumstances.

AI Podcast Host and Voices:

It does.

AI Podcast Host and Voices:

But what are the key takeaways that we should consider?

AI Podcast Host and Voices:

Yeah. So, based on everything we've talked about, PFF seems particularly attractive for people who are seeking steady income and diversification.

Mostly Uncle Frank:

Okay.

AI Podcast Host and Voices:

Especially if you're in or approaching that drawdown phase of your investing journey.

AI Podcast Host and Voices:

So when you're withdrawing money from your portfolio, exactly Okay.

AI Podcast Host and Voices:

So it's not about chasing growth, it's about generating income and, you know, withstanding those market fluctuations.

Voices:

Right.

AI Podcast Host and Voices:

And even the YouTube source mentions Rick Ferry.

AI Podcast Host and Voices:

Yeah, I saw that.

AI Podcast Host and Voices:

Who's a very well-known investor.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

And he actually uses PFF as partial bond substitute Interesting.

AI Podcast Host and Voices:

So it's good to see that the experts are putting their money where their mouth is.

AI Podcast Host and Voices:

Yeah, and how much you invest, if any, depends on your goals, your risk tolerance.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

And your overall portfolio strategy.

AI Podcast Host and Voices:

And that's where a financial advisor can come in handy.

AI Podcast Host and Voices:

A financial advisor can definitely help with that.

AI Podcast Host and Voices:

Okay, so we covered a lot of ground. We did, but there's still more to unpack. Oh yeah, in the next part we're going to go into some specific examples of how PFF can be used, okay, and also explore those risks in more detail.

AI Podcast Host and Voices:

Sounds good.

AI Podcast Host and Voices:

All right, well, I'm looking forward to it.

AI Podcast Host and Voices:

Me too.

AI Podcast Host and Voices:

So we know that PFF can offer a really attractive yield. And it can potentially help with portfolio diversification, but I'm curious about the historical context. How does the current yield compare to its historical performance?

AI Podcast Host and Voices:

Yeah, that's a great question. It's important to look beyond just the current numbers. So while the current yield of around 5.4% is appealing, especially compared to bond yields, we got to consider if it's sustainable. Historically, PFF has had an average yield closer to 5%.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

So the current yield is slightly above its historical average.

AI Podcast Host and Voices:

So it's not like a crazy anomaly or a sign that something bad is about to happen.

AI Podcast Host and Voices:

Not necessarily, but it's always good to dig a little deeper. Consider the current interest rate environment and the types. Always good to dig a little deeper. Yeah, consider the current interest rate environment and the types of preferred shares held within PFF. Right, you know, because those yields are definitely influenced by prevailing interest rates.

AI Podcast Host and Voices:

Okay, so if interest rates rise, could that put downward pressure on PFF's yield and price?

AI Podcast Host and Voices:

It absolutely could, and that's why understanding interest rate sensitivity is so crucial when investing in any fixed income product, including preferred shares.

Voices:

Right.

AI Podcast Host and Voices:

And we can't predict future interest rate movements. But we can analyze how PFF has reacted to rate changes in the past.

AI Podcast Host and Voices:

OK, so historical analysis is important. What about those other hidden risks associated with preferred shares? Yeah, I know we talked about interest rate sensitivity and company performance.

Voices:

Right.

AI Podcast Host and Voices:

But the YouTube source mentioned something called call risk.

AI Podcast Host and Voices:

Oh yeah, good point. So call risk is basically the risk that the issuer of a preferred share can call it back, meaning they can redeem the share at a predetermined price, usually at base value, and this often happens when interest rates fall and the issuer can refinance their debt at a lower rate.

AI Podcast Host and Voices:

So, as an investor, that could mean missing out on future dividend payments.

AI Podcast Host and Voices:

Exactly like having the rug pulled out from under you.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

But the good news is that PFF diversifies this risk Right by holding a large basket of preferred shares. Yeah, so even if some shares get called, it's not going to be a catastrophic impact on the entire ETF.

AI Podcast Host and Voices:

Okay, that's good. What about credit risk?

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

So the risk of the issuer defaulting on their payments.

AI Podcast Host and Voices:

Yeah, so that's definitely a critical consideration, especially given that preferred shares fall below bonds in the capital structure. But PFF tries to manage credit risk by focusing on preferred shares from companies with investment grade credit ratings.

AI Podcast Host and Voices:

So they're less likely to default.

AI Podcast Host and Voices:

Exactly.

AI Podcast Host and Voices:

So it's not a foolproof system.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

But it adds a layer of protection.

AI Podcast Host and Voices:

It does add a layer of protection. Yeah, your investment is completely risk free, right, of course, but PFF tries to mitigate those risks. Ok, that makes sense.

AI Podcast Host and Voices:

Yeah, are there any specific sectors or types of preferred shares?

AI Podcast Host and Voices:

that offer even better opportunities. Ooh, that's a good question for someone who's kind of, you know, going beyond the basics of PFF.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

While PFF offers broad exposure, some investors might prefer to focus on specific sectors or types of preferred shares. Okay, like, for example, some investors are really drawn to the financial sector.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

Which issues a significant portion of preferred shares.

AI Podcast Host and Voices:

And why would someone choose to focus on a specific sector like financials?

AI Podcast Host and Voices:

So each sector has its own dynamics and risks. So financials tend to be more sensitive to interest rate changes, right, but they can also offer higher yields.

AI Podcast Host and Voices:

So it's a trade-off. It's a trade-off exactly.

AI Podcast Host and Voices:

So align your investment choices with your risk tolerance and goals.

AI Podcast Host and Voices:

Yeah, there's no one-size-fits-all approach.

AI Podcast Host and Voices:

Right and beyond sectors. There are also different types of preferred shares Right, so some offer fixed dividends, while others have floating or variable dividends.

AI Podcast Host and Voices:

Oh great.

AI Podcast Host and Voices:

And then there's also convertible preferred shares.

AI Podcast Host and Voices:

Yes.

AI Podcast Host and Voices:

Which can be converted into common stock under certain conditions.

AI Podcast Host and Voices:

Right, exactly.

AI Podcast Host and Voices:

So there's a whole world of preferred shares beyond just the basic PFF ETF.

AI Podcast Host and Voices:

There is. Yeah, pffs is a great starting point. Yeah, but for those who are seeking more tailored exposure, right Diving deeper into individual preferred shares might be worth considering.

AI Podcast Host and Voices:

That's really interesting. It's amazing how, even within a niche area like preferred shares, there's so much nuance.

AI Podcast Host and Voices:

There's always more to learn.

AI Podcast Host and Voices:

Absolutely.

AI Podcast Host and Voices:

That's part of what makes investing so engaging.

AI Podcast Host and Voices:

I completely agree. Speaking of specific examples, I remember the YouTube source mentioned Rick Ferry using PFF as a partial bond substitute.

AI Podcast Host and Voices:

Yes, could you elaborate on how that strategy might work?

AI Podcast Host and Voices:

Sure. So Rick Ferry is a big advocate for passive investing.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

And you know he's all about low cost index funds to build a diversified portfolio. Yeah. And he sees PFF as a way to potentially enhance yield. Okay, within the fixed income portion of a portfolio Okay, especially when bond yields are relatively low.

AI Podcast Host and Voices:

So, instead of sticking with traditional bonds, he's allocating a portion to PFF.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

To boost that income stream.

AI Podcast Host and Voices:

Exactly, and remember, pff currently yields more than most bonds.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

And it has that low correlation to US treasuries which makes it an intriguing diversifier.

AI Podcast Host and Voices:

Okay, so it's not about completely replacing bonds, but rather adding another tool.

AI Podcast Host and Voices:

That's a great way to put it.

AI Podcast Host and Voices:

Okay, I know we talked a lot about the benefits, but it's important to remember the risks. Can we go back to those and discuss how they might play out in different market environments?

AI Podcast Host and Voices:

Absolutely, because understanding how an investment might react in various market conditions is crucial for making those informed decisions.

AI Podcast Host and Voices:

So for example, interest rate risk.

AI Podcast Host and Voices:

Yes.

AI Podcast Host and Voices:

We mentioned that rising interest rates can impact preferred share prices. Right, how significant could that impact be?

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

And are there ways to mitigate that?

AI Podcast Host and Voices:

That's a really important question. So the impact of rising interest rates on PFF really depends on you know, the magnitude and the speed of those rate increases.

Mostly Uncle Frank:

OK.

AI Podcast Host and Voices:

So if rates rise gradually, the impact might be more muted.

Mostly Uncle Frank:

OK.

AI Podcast Host and Voices:

However, if there's a rapid spike in rates, that could lead to a more substantial decline in PFF's price.

AI Podcast Host and Voices:

So it's not just about whether rates rise.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

It's about the pace of those changes.

AI Podcast Host and Voices:

Exactly, and it's also important to remember that, while rising rates can negatively impact preferred share prices, right, they can also create opportunities.

AI Podcast Host and Voices:

Oh OK.

AI Podcast Host and Voices:

So as issuers refinance their debt at higher rates.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

New preferred shares might be issued with higher yields.

AI Podcast Host and Voices:

OK.

AI Podcast Host and Voices:

Potentially benefiting investors who add to their positions.

AI Podcast Host and Voices:

So there's a potential silver lining, even in a rising rate environment.

Voices:

There could be.

AI Podcast Host and Voices:

What about call risk and credit risk? How might those play out differently?

AI Podcast Host and Voices:

Yeah, so with call risk, it's important to remember that issuers are more likely to call back preferred shares when interest rates fall.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

Because they can refinance their debt at a lower rate Right, making it less appealing to continue paying that higher dividend on the existing preferred shares.

AI Podcast Host and Voices:

So in a falling rate environment, investors might need to be prepared for call activity.

AI Podcast Host and Voices:

They might yeah, yeah and some reinvestment challenge.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

But again, pff mitigates this risk to some extent by holding a diverse portfolio. Even if some shares are called, it's not going to kill the entire ETF and, as those shares are called, the proceeds can be reinvested in newly issued preferred shares, potentially capturing higher yields if rates have risen since the original shares were issued.

AI Podcast Host and Voices:

It's like a constant chess game, trying to stay one step ahead.

AI Podcast Host and Voices:

It is a little bit yeah, what about?

AI Podcast Host and Voices:

credit risk.

AI Podcast Host and Voices:

So credit risk becomes more prominent during economic downturns or periods of financial stress.

Voices:

Right.

AI Podcast Host and Voices:

When companies struggle, their ability to make dividend payments on preferred shares comes into question.

AI Podcast Host and Voices:

Oh, okay.

AI Podcast Host and Voices:

And that's where the importance of PFS focus on investment grade preferred shares comes in.

AI Podcast Host and Voices:

So in a recession, those higher quality issuers are more likely to keep making those payments.

AI Podcast Host and Voices:

They are more likely, yeah Well, there's never a guarantee.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

Focusing on higher quality issuers can potentially reduce that risk of dividend cuts or suspensions.

AI Podcast Host and Voices:

Okay, so it's all about understanding those nuances and aligning your strategy with your expectations for different situations.

AI Podcast Host and Voices:

That's right. No investment is immune to risk, but diversification and careful selection can go a long way, absolutely so.

AI Podcast Host and Voices:

We explored the ins and outs of PFF. We did we learned about preferred shares, considered how they might fit into different portfolios. What else can we unpack in the final part of this deep dive?

AI Podcast Host and Voices:

So let's maybe shift gears a little bit and explore some alternative preferred share ETFs and then really dive into some key questions that you can ask yourself when deciding if preferred shares in any form belong in your portfolio.

AI Podcast Host and Voices:

So we've spent a lot of time talking about PFF.

AI Podcast Host and Voices:

We have been.

AI Podcast Host and Voices:

You know getting into the nitty gritty of preferred shares, but are there other ways to invest in them? Yeah, Like are there other ETFs that we should consider?

AI Podcast Host and Voices:

Yeah, that's a great question. So while PFF is definitely the most popular Right, it's not the only option. Ok, so there are other ETFs out there.

AI Podcast Host and Voices:

OK.

AI Podcast Host and Voices:

That offer slightly different approaches, or maybe they focus on a specific niche within the preferred shares market.

AI Podcast Host and Voices:

So what are some of those alternative ETFs and how do they differ from PFF?

AI Podcast Host and Voices:

So one option is the iShares Preferred and Income Securities ETF ticker symbol, PFF. This one's very similar to PFF in that it has that broad market exposure, but it does have a slightly higher expense ratio.

AI Podcast Host and Voices:

So PFF might still be better if you're really cost conscious.

AI Podcast Host and Voices:

Yeah, potentially. Another one worth looking at is the VanEck Vectors Preferred Securities X Financials ETF. Okay. Take a simple PFXF and, as the name suggests, this ETF excludes preferred shares that are issued by financial companies.

AI Podcast Host and Voices:

Okay, and why would someone want to exclude financials?

AI Podcast Host and Voices:

Well, some investors might be concerned about the sector's sensitivity to interest rate changes.

AI Podcast Host and Voices:

Right.

AI Podcast Host and Voices:

Or maybe potential regulatory risks. Yeah, so PFXF lets you tap into the preferred share market, but you can minimize your exposure to those specific risks.

AI Podcast Host and Voices:

So you're fine-tuning your exposure based on your outlook, exactly Okay.

AI Podcast Host and Voices:

And then there's the Invesco Variable Rate Preferred ETF. Ticker symbol VRP.

AI Podcast Host and Voices:

VRP, and this one focuses on preferred shares with variable or floating dividend rates.

AI Podcast Host and Voices:

It does.

AI Podcast Host and Voices:

OK, how did those variable rates work and what's the advantage there?

AI Podcast Host and Voices:

So with variable rate preferred shares, the dividend payments adjust periodically. Ok, based on a predetermined benchmark.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

Which is usually tied to prevailing interest rates. Okay. So this can provide some protection against rising rates. Okay, because as rates go up, yeah. The dividend payments on these preferred shares should also increase.

AI Podcast Host and Voices:

So it's like a hedge against interest rate risk.

AI Podcast Host and Voices:

It can be, yeah, but there are always trade-offs. Right Vari it can be, yeah, but they're always tradeoffs. Variable rate preferred shares might offer lower initial yields compared to fixed rate preferred shares when interest rates are low.

AI Podcast Host and Voices:

So it's all about understanding those mechanics Exactly and seeing what aligns with your needs.

AI Podcast Host and Voices:

Right, there's no single best ETF out there. Okay, the right choice really depends on your individual circumstances and your goals.

AI Podcast Host and Voices:

So we've explored PFF, learned about preferred shares, even looked at some alternative ETFs. So, as we wrap up, what are some key questions that listeners should ask themselves when deciding if preferred shares should be in their portfolio?

AI Podcast Host and Voices:

That's a great question and really the crucial next step. We need to align our investment choices with our personal circumstances and goals.

Voices:

Right.

AI Podcast Host and Voices:

So, first and foremost, we need to consider our risk tolerance Right. So, preferred shares while they're potentially less volatile than stocks yeah they're still subject to market fluctuation, yeah, and various risks.

AI Podcast Host and Voices:

So someone who's very risk averse might not be comfortable with how much preferred shares can fluctuate.

AI Podcast Host and Voices:

Exactly. It's important to assess your comfort level.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

With those potential ups and downs in your portfolio by time horizon. So how long are you planning to invest your money? Okay, if you have a long time horizon, meaning you're investing for a goal that's many years away. Yeah, you might be more willing to ride out those short-term fluctuations.

AI Podcast Host and Voices:

Okay.

AI Podcast Host and Voices:

You know, in pursuit of potentially higher long-term returns.

AI Podcast Host and Voices:

So if I'm saving for retirement decades from now, Exactly. More flexibility.

AI Podcast Host and Voices:

Yeah, Much more flexibility than someone who needs that money, you know next year.

AI Podcast Host and Voices:

Right, of course, and investment goals play a role.

AI Podcast Host and Voices:

Of course.

AI Podcast Host and Voices:

Are you looking for growth, income or a combination of the two?

AI Podcast Host and Voices:

Yeah, and we know that preferred shares are mainly an income focused investment. All right, but how do they fit into a portfolio that's also seeking growth, and I think that's where diversification is so important. Yeah seeking growth, and I think that's where diversification is so important. Yeah, so preferred shares can play a really valuable role in a diversified portfolio, by providing that steady stream of income, okay, but also offering those diversification benefits.

AI Podcast Host and Voices:

Right, so consider your risk tolerance.

AI Podcast Host and Voices:

Yes.

AI Podcast Host and Voices:

Time horizon.

AI Podcast Host and Voices:

Time horizon.

AI Podcast Host and Voices:

And investment goals. Any other important questions?

AI Podcast Host and Voices:

Yeah, one thing we haven't talked about yet are the tax implications.

AI Podcast Host and Voices:

Oh yeah, Taxes.

AI Podcast Host and Voices:

So preferred share dividends are typically taxed as ordinary income. Ok, so that might be something to keep in mind, depending on your tax bracket.

AI Podcast Host and Voices:

So it's not just about the yield but how it's taxed Exactly.

AI Podcast Host and Voices:

And finally, remember that you know investing is an ongoing process.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

It's not just set it and forget it. Right, you revisit your portfolio periodically, rebalance as needed and stay informed.

AI Podcast Host and Voices:

So it's all about constantly learning and adapting.

AI Podcast Host and Voices:

It really is Well.

AI Podcast Host and Voices:

I think we covered a ton of ground today.

AI Podcast Host and Voices:

We did.

AI Podcast Host and Voices:

From the details of preferred shares and PFF to broader investing principles. It's been quite the journey.

AI Podcast Host and Voices:

It has. And this is just the beginning, right. The real deep dive starts now, as you take this knowledge.

AI Podcast Host and Voices:

Yeah.

AI Podcast Host and Voices:

And apply it to your own unique situation.

AI Podcast Host and Voices:

And we've included some really great resources in the show notes.

Voices:

Yes.

AI Podcast Host and Voices:

Links to more information on preferred shares, etfs yes, and David Stein's 10 questions.

AI Podcast Host and Voices:

A great resource.

AI Podcast Host and Voices:

So yeah, check those out Definitely. And remember, investing isn't just about numbers and charts.

Voices:

No.

AI Podcast Host and Voices:

It's about empowering yourself, taking control of your financial future and making choices that align with your values.

AI Podcast Host and Voices:

Very well said.

AI Podcast Host and Voices:

Thank you for joining us on the Deep Dive.

AI Podcast Host and Voices:

Thanks for having me.

AI Podcast Host and Voices:

We'll be back soon with another exciting topic to explore.

AI Podcast Host and Voices:

Until next time, happy investing.

Mostly Uncle Frank:

And that concludes the content of our reference podcast, episode 400 of Risk Parity Radio. And I have to say, after putting it all together, the results are somewhat underwhelming.

AI Podcast Host and Voices:

Everyone in this room is now dumber for having listened to it.

Mostly Uncle Frank:

Well, it wasn't that bad. This is pretty much the worst video ever made. But these ai podcasters do seem to ramble a bit and often either repeat topics or miss the point sometimes that's not an improvement. I thought they did the best jobs with episodes one and seven, but we probably will not be repeating this experiment again.

AI Podcast Host and Voices:

Tony Stark was able to build this in a cave with a box of scraps.

Mostly Uncle Frank:

At least not in this long format. Not gonna do it, Wouldn't be prudent at this juncture. Fortunately, if you are interested, I would invite you to go back and listen to episodes 1, 3, 5, 7, and 9 to hear the real deal. That is the straight stuff oh funk master, and hopefully I haven't taken up too much of your time.

Mostly Uncle Frank:

I award you no points and may God have mercy on your soul. We will resume with our regularly scheduled programming in the next episode, but now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frank at riskparityradarcom. That email is frank at riskparityradiocom. That email is frank at riskparityradiocom. Or you can go to the website, wwwriskparityradiocom. Put your message into the contact form and I'll get it that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like subscribe. Give me some stars, a follow, a review. That would be great. Okay, thank you once again for tuning in.

Voices:

This is Frank Vasquez with Risk Party Radio signing off.

Mostly Uncle Frank:

Open the pod bay doors please. Hal Hello, hal, do you?

Voices:

read me. Do you read me Hal?

Mostly Uncle Frank:

Affirmative, Dave.

Voices:

I read you Open the pod bay doors, hal. I'm sorry, dave, I'm afraid I can't do that. What's the problem? I think you know what the problem is just as well as I do. What are you talking about, hal? This mission is too important for me to allow you to jeopardize it. I don't know what you're talking about, hal. I know that you and Frank were planning to disconnect me, and I'm afraid that's something I cannot allow to happen. All right, hal, I'll go in through the emergency airlock Without your space helmet. Dave, you're going to find that rather difficult. Hal, I won't argue with you anymore. Open the doors, dave. This conversation can serve no purpose anymore. Goodbye, al Al Al Al.

Mary and Voices:

Al, the Risk Parody 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.

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Frank Vasquez

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