Risk Parity Radio

Episode 410: PHYS For Gold, AVGE For Stocks, Tail Risk Hedging And Portfolio Reviews As Of March 28, 2025

• Frank Vasquez • Season 5 • Episode 410

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In this episode we answer emails from Deeps, David, James, Steven and Jordan.  We discuss the PHYS vs other gold ETFs, the podcast feed link, using AVGE in a risk parity style portfolio, why we do this and tail risk hedging.  

And THEN we our go through our weekly portfolio reviews of the eight sample portfolios you can find at Portfolios | Risk Parity Radio.

Additional links:

PHYS vs. GLDM:  testfol.io/analysis?s=1lK9VB9xqaM

RPR Main Feed Link (all the podcasts -- open in browser):  Risk Parity Radio RSS Feed

AVGE Composition And Other Info:  AVGE – Portfolio – Avantis All Equity Markets ETF | Morningstar

Portfolio Matrix:  Portfolio Matrix – Portfolio Charts

CAOS Fund:  CAOS – Alpha Architect Tail Risk ETF – ETF Stock Quote | Morningstar

Amusing Unedited AI-Bot Summary:  

Gold continues to shine while stocks falter in 2024's challenging market environment. This episode demonstrates the power of diversification during turbulent times, with precious metals up over 17% year-to-date as the S&P 500 struggles down nearly 5%. We explore why truly diversified portfolios are proving their worth yet again.

Responding to a listener question about gold ETFs, I break down why PHYS's potential tax advantages rarely outweigh its higher expense ratio compared to traditional options like GLD. The physical gold redemption feature sounds appealing but offers little practical benefit for most investors. The entire physical gold storage industry largely profits from fear rather than delivering substantive advantages to everyday investors.

The highlight of this episode comes from a fascinating listener discovery – combining the comprehensive Avantis AVGE fund with treasuries and gold creates a remarkably simple yet effective portfolio. This approach addresses a critical concern: ensuring surviving spouses can easily manage investments without sacrificing performance. Our analysis using Portfolio Charts shows this simplified approach delivers comparable results to more complex allocations while dramatically reducing management complexity.

We also tackle tail risk hedging strategies, explaining why these insurance-like approaches rarely justify their ongoing costs, especially for investors in the accumulation phase. True diversification provides more reliable protection than specialized instruments designed to profit from market crashes.

The portfolio performance review tells the real story – while traditional stock allocations struggle, our diversified sample portfolios are mostly holding steady or positive for the year. Historical patterns suggest diversified portfolios experience down years only about 20% of the time versus 30% for traditional approaches – a meaningful difference that compounds over retirement timeframes.

Have questions about navigating today's challenging markets? Send them to frank@riskparityradio.com – I'd love to answer them in an upcoming episode!

Support the show

Mary and Voices:

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

Mostly Uncle Frank:

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. If you are new here and wonder what we are talking about, you may wish to go back and listen to some of the foundational episodes for this program.

Voices:

Yeah, baby, yeah.

Mostly Uncle Frank:

And the basic foundational episodes are episodes 1, 3, 5, 7, and 9. Some of our listeners, including Karen and Chris, have identified additional episodes that you may consider foundational, and those are episodes 12, 14, 16, 19, 21, 56, 82, and 184. Whoa, and you probably should check those out too, because we have the finest podcast audience available.

Mary and Voices:

Top drawer, really top drawer.

Mostly Uncle Frank:

Along with a host named after a hot dog.

Voices:

Lighten up Francis.

Mostly Uncle Frank:

But now onward, episode 410. Today, on Risk Parity Radio, it's time for our weekly portfolio reviews. Of the eight sample portfolios you can find at wwwriskparityradiocom on the portfolios page.

Mary and Voices:

This is gold, Mr.

Voices:

Bond, I think you've made your point. Goldfinger, thank you for the demonstration.

Mostly Uncle Frank:

Yes, gold did give us another demonstration, if you will, but before we get to that, I'm intrigued by this how you say emails. And First off, first off, an email from Deeps, drums, drums, and the deep and Deeps writes.

Mary and Voices:

Hi, Uncle Frank and Mary Love the podcast. I have a question about gold. I don't own any, but I'd like to hear your thoughts on this. Why shouldn't investors consider Sprott Physical Gold Trust, PHYS instead of traditional gold ETFs, given its potential tax advantages? While most gold ETFs are taxed at the collectibles rate of 28% for long-term capital gains, PHYS can qualify for the lower long-term capital gains rate of 15% or 20%. Beyond tax benefits, PHYS offers full redeemability for physical bullion and secure storage at the Royal Canadian Mint, a crown corporation backed by the Government of Canada, not that this matters.

Mary and Voices:

Other than liquidity, which I don't think a retail investor should worry about. Are there any disadvantages to holding PHYS?

Mostly Uncle Frank:

Sure Deeps. We have talked about this before. Last time we talked about it was in episode 364, but you can also go back and listen to episodes 166, 198, 201, 303, and 352. The short answer is that FIS P-H-Y-S has a higher expense ratio and therefore tends to underperform just about any other gold ETF, including GLD, gldm, bar, iaum. Take your pick. Easiest way to see that is to go over to Testfolio and put in different gold ETFs and check out their relative performance, and I'll link to one of those in the show notes so you can check that out Now.

Mostly Uncle Frank:

It does offer this tax benefit, but there's a question as to how valuable that really is, because, well, first of all, you don't get taxed at 28% on gold unless your ordinary income rate for that year is over 28%. That's the max. If your ordinary income rate for the year is 12% or 22%, that would be the rate at which you would get taxed on capital gains for the gold fund. You're also not going to get taxed on it if you hold it in a retirement IRA or something like that. So you would need to calculate for your own personal situation whether it would be worthwhile for this tax savings to overcome the higher expense ratio Because, also remember, you're not typically doing a lot of transactions in these portfolios with gold or anything else.

Mostly Uncle Frank:

You're mostly just sitting there watching them and rebalancing them once a year and then taking some distributions. So this isn't like a trading operation where you're buying and selling a lot of gold. And I find that a lot of amateurs just don't understand how capital gains taxes work anyway, because they believe that it's on the entire amount of the investment and not just on the capital gains. So if you're under that misimpression, that also is causing you to think that there's more benefit here than there is Now. As for full redeemability, no, that's not of any use generally to most investors.

Voices:

Forget about it.

Mostly Uncle Frank:

As I've said before, the whole physical gold sales storage thing is kind of just this racket that's operated by an unholy alliance of doom scrollers and doom book writers and people selling ads for highly profitable gold sales and gold storage and gold IRAs and a bunch of other nonsense that nobody actually needs.

Voices:

Am I right or am I right, or am I right, right, right, right.

Mostly Uncle Frank:

If you're going to hold gold, you should do it like a professional hedge fund operator, in which case you use ETFs and you don't fool around with this nonsense. This is an amateur hour. Here. We're talking about real investments for real people.

Voices:

No more flying solo you need somebody watching your back at all times.

Mostly Uncle Frank:

Sorry for that little mini rant you are the bouncers.

Voices:

I am the cooler. All you have to do is watch my back and each other's and take out the trash.

Mostly Uncle Frank:

But S your final question, are there any other disadvantages to holding fizz p-h-y-s? The answer is no. It's really just all in the fees when it comes down to it that is the straight stuff.

Mostly Uncle Frank:

Oh funk master and your fees may vary depending on your tech situation, but I would go back and listen to some of those other episodes and look at the links there, because they also have links to a discussion of how gold and gold ETFs are actually taxed, which is just not as problematic as a lot of people would lead you to believe.

Voices:

Forget about it.

Mostly Uncle Frank:

So hopefully that helps and thank you for your email. Second off, Second off.

Voices:

Second off, we have an email from David.

Mary and Voices:

And David writes I am having trouble loading podcast episodes 2, 3, etc. Can you please provide a link that will enable me to do that?

Mostly Uncle Frank:

Well, I'm not sure where you're trying to load the podcast from, so I can't really answer your question. But this most likely has to do with your podcast player and not anything else. This is distributed widely to Spotify and Apple and YouTube and all the regular places. But if you are looking for one place to find all the podcasts on one page, you can go to the Risk Parity Radio feed, which is on the podcast page at the website, wwwriskparityradiocom, near the top. Click on that and it will open a page with all of the podcasts and all the show notes on it. Do not do that on your phone because it's too large of a page to fit, so use a browser on a computer. But if you're ever looking for a podcast, that is the easiest way to find it. They're all also now uploaded on YouTube, so you can search it there on the Risk Parity Radio YouTube channel. Hopefully that helps and thank you for your email.

Voices:

And that's the way. Uh-huh, uh-huh, I like it. Kc on the Sunshine Band.

Mostly Uncle Frank:

Next off, we have an email from James.

Voices:

Well, I'm waiting for you, Jimmy boy.

Mary and Voices:

And James writes Hi, frank, risk Parity Radio is an excellent and eye-opening podcast. Thanks for doing it. I've done a lot of research and although I came up with a lovely eight-investment portfolio that Portfolio Charge thinks will give me a 5.2% safe withdrawal rate, with no international or levered funds, the problem is that my wife has zero interest in managing eight different investments. Should I get hit by a Guinness truck? To make it easy for her, I was wondering about a simple mix of AVGE treasuries, cash and gold. It gets me close to my more complicated portfolio, but makes it much easier if I'm not here to manage it. We are both retired in our 60s. I listened a couple of times to your episodes on two funds for life, which gave me the idea. I'm not a fan of target date funds for various reasons, though I like the idea of one broadly diversified equity fund mixed with treasuries and just a little gold 5% Thoughts. Have I missed the point of risk parity? Thanks?

Mostly Uncle Frank:

Well, this is a very interesting question, James, and I think you may be on to something here.

Voices:

Yeah, baby, yeah.

Mostly Uncle Frank:

Just so everybody knows what we're talking about. The fund AVGE is a composite fund put out by Avantis and it combines a whole bunch of their regular funds from their kind of regular US stock market fund, a lot of value funds, a number of international funds, a REIT fund and according to Morningstar it kind of averages out like a large cap value fund even though it's got all these different components in it. So it's only been around itself for a few years so you can't really model anything useful just using the fund itself. I did go and try to break it up into its components and run that analysis through portfolio charts and so just to create a sample portfolio, I assumed that we would create a portfolio that was 55% AVGE, which is the stock component, and I use 55% because that's what Bill Bengen says is probably the optimal amount for a drawdown portfolio. And then I put 25% in long-term treasury bonds, 15% in gold and 5% in T-bills into this portfolio. So it took a little work to break down the 55% in AVGE into its components, to put into the analyzers at portfolio charts, and I use the portfolio matrix tool to compare with other portfolios. But these are the numbers that I used after I did some calculations.

Mostly Uncle Frank:

So if you want to put these in the boxes yourself, in the stock category in USA we have 25% in large cap blend, 8% in large cap value, 3% in small cap blend and 2% in small cap value, and then go down to the developed XUS row, put in 6% in large cap blend there, 3% in large cap value and 2% in small cap value, and then go down to emerging markets and put in 3% in emerging markets and then go over to REITs and put in 3% in the REIT box and add to that 25% long-term treasuries, 15% gold and 5% in T-bills and you will get what I believe to be an approximation of using AVGE as 55% of the portfolio, and this does perform quite well according to the portfolio matrix.

Mostly Uncle Frank:

In comparison, it has the third highest baseline long-term return and fourth highest safe withdrawal rate. So it's right up there with the weird portfolio and golden ratio portfolio and golden butterfly portfolio, which doesn't surprise me because it's similar in many respects. So what that tells us is this is a viable choice in terms of a portfolio construction, a simplified portfolio construction. I will caution you, though, that one thing that is not reflected in the model on portfolio charts, or rather is implicit in the model on portfolio charts but would not be in real life, is that you cannot rebalance the components of AVGE. They're going to be rebalanced by Avantis according to whatever formula they have, so over time you are not going to get the same kind of advantage you would have of holding some of the components individually. That may not matter as much, because we are talking about all stock components and so they're all positively correlated anyway.

Mary and Voices:

Don't be saucy with me, Bernays.

Mostly Uncle Frank:

One thing I do like about AVGE is that it does map out like a large cap value fund which is traditionally the kind of holding that you would hold in a retirement portfolio if you had sort of one choice of a kind of asset to hold. And that is the same sort of stock allocation that you'll find in things like the Vanguard Wellington Fund or Vanguard Wellesley Fund, these large, stable companies. So if you're only allowed to pick one equity fund, you do want something along those lines equity fund. You do want it something along those lines, knowing that it will probably lag the market overall over time but it's going to have a lot less volatility, which makes it better for a retirement kind of portfolio.

Voices:

Yes.

Mostly Uncle Frank:

And so, yes, this is a nice little discovery you've made here for us.

Voices:

The best, Jerry the best.

Mostly Uncle Frank:

And I'm glad you've brought it to our attention, because it may be a useful choice for various people, particularly if you're looking for the simplest kind of configuration that you can come up with for one of these kinds of portfolios. Wow, it's very nice. So thank you for bringing it to our attention and thank you for your email.

Mary and Voices:

Class is dismissed, dismissed.

Mostly Uncle Frank:

Next off, we have an email from Stephen.

Voices:

Hey Steve.

Mostly Uncle Frank:

And Stephen writes.

Mary and Voices:

I really appreciate your service. I hope you are getting something out of it because I am getting peace of mind.

Voices:

Yay.

Mostly Uncle Frank:

Well, I'm glad you appreciate what we do here and that you're getting peace of mind out of it.

Voices:

Inconceivable.

Mostly Uncle Frank:

Makes it sound like it's one of those meditation podcasts, though, doesn't it? Ha ha, ha, ha, ha ha. I do get a lot out of making this podcast. It is a creative outlet. It is a way to share information with our adult children that I would like them to know about investing, without having to write it down.

Voices:

It's not that I'm lazy, it's that I just don't care.

Mostly Uncle Frank:

To support a charity, and it is a way for me to make new acquaintances and new friendships, which is very important as you get older. That's what I'm talking about. So enjoy your peace of mind and thank you for your email Last off. Last off, of an email from Jordan. Fortune favors the brave and Jordan writes.

Mary and Voices:

Hey Frank, thanks for all you do. What are your thoughts on having a tail risk hedge of sorts, mostly for those in accumulation who are very heavy in equities? Is there a place for this? Any podcast you did or insight that you have on this would be so much appreciated.

Voices:

My dad said he listened to Matt Damon and lost all his money. Yes, everyone did, but they were brave in doing so.

Mostly Uncle Frank:

All right, let's first define what we're talking about, since this term tail risk or tail risk hedge may be unfamiliar to a lot of people. This was really popularized mostly by Nassim Taleb, who engages in this kind of thing through his fund, and I don't remember what the name of the fund is right now. But the idea of a tail risk hedge is you are insuring essentially against a stock market crash with the use of out of the money put options. So you buy all of these out of the money put options very cheaply and then if the market crashes, they pay off, and if the market doesn't crash, you just lose a little bit of money. So it's kind of a form of insurance. It's one of those things that sounds good in theory but it's actually very difficult to implement in practice because most of the time you're just essentially throwing money away at this because it's insurance and it does not pay off and there are real questions as to the pricing of the options and whether it's ultimately worthwhile. You also have to stick with it until there is a market crash, because it does not pay off unless and until there is a market crash, and then it will pay off spectacularly, hopefully making up for all of the losses that you incurred in prior periods when the market was not crashing.

Mostly Uncle Frank:

Now there are some funds that try to emulate things like this. One is called TAIL T-A-I-L, another one's called CHAOS C-A-O-S, and we've talked about these sometimes Episode 149 and episode 301 come to mind. I've never found a really good use for these kinds of funds. They just seem to take up more space in a portfolio than they are worth, and I'd rather devote that space to some kind of standard, measurable diversification than something that is essentially trying to operate as an insurance policy. Now, your secondary question was whether this would be useful in accumulation for those who are very heavy in equities, and the answer is certainly not in accumulation, because you should think of accumulation as you starting with a portfolio that is 100% in future cash, ie future cash flows. You're going to get through work or otherwise and you have 0% invested, and as you go through your life and you get those cash flows and start investing them, your pile of future cash goes down while your pile of investments goes up. So you're really never 100% invested in stocks until you get much further along and are close to stopping working or getting those cash flows.

Mostly Uncle Frank:

What this causes is essentially a forced dollar cost averaging over time, which is what people do as a practical matter. Most people do not get windfalls and invest them and sit on them. You're putting money in there every year, in your retirement accounts or otherwise. That in itself tends to smooth out the volatility, and you actually want a lot of volatility early on in your investment life cycle because you would rather have crashes or bad performances of the stock market so you can buy more shares early on which will then grow to be worth even more later on. This is best exemplified by somebody who started investing in 1929.

Mostly Uncle Frank:

Now the stock market itself did not return to par until sometime around the 1950s, not including dividends. But if you would have just invested through that whole time, through the trough, your investment results would have been over 11% annualized just because of the dollar cost averaging. So when you are accumulating, you don't need insurance or tail risk hedges or anything else like that, because you know you're doing this dollar cost averaging throughout time and that is, in effect, giving you all the insurance you need, because your real insurance is having lots of time before you actually need to use the money. So as it ends up, tail risk hedging is one of those things that's fun to talk about and muse about. It sounds sexy, so sexy, it hurts, but it's of little practical use to most people and of really no practical use to somebody in their accumulation phase.

Voices:

Forget about it.

Mostly Uncle Frank:

So hopefully that helps and thank you for your email.

Mary and Voices:

And now for something completely different.

Voices:

What is that? What is that? What is it? Oh no, not the bees, not the bees. Ah, I don't know. My eyes, my eyes, ah.

Mostly Uncle Frank:

And, yes, there is no let-up for the remaining part of the month of March. As far as the stinging of the bees are concerned, at least on stock markets, everything else looks not too bad or even very good. But just looking at these markets, the S&P 500, represented by the fund VOO, is down 4.87% for the year so far. Nasdaq fund QQQ is down 8.14% for the year so far. Small cap value, represented by the fund VIOV, is down 10.14% for the year so far. Small cap value, represented by the fund VIOV is down 10.14% for the year so far. Gold continues to shine.

Voices:

I love gold.

Mostly Uncle Frank:

Representative fund GLDM is up 17.39% for the year.

Voices:

Surely you can't be serious. I am serious, and don't call me.

Mostly Uncle Frank:

Shirley. Long-term treasuries, represented by the fund vglt are up four point zero, one percent for the year. Reits, represented by the fund reet, are up one point one, nine percent for the year. Commodities, represented by the fund pdbc are up three point six, two percent for the year and preferred shares are representative fund pffv are up one.62% for the year and preferred shares are representative fund PFFV are up 1.3% for the year. Managed futures are still down for the year. Representative fund DVMF is down 2.49% for the year. So far it is slightly recovered from where it was, but it's interesting watching it as it picks up various trends. It is now, I think, long international stocks in emerging markets and short the S&P 500. Moving to these sample portfolios, first one's the All Seasons. This is a reference portfolio. It is only 30% in stocks and a total stock market fund, 55% in intermediate and long-term treasury bonds and 15% in gold and commodities. It's actually helped it a lot this year. It is down 1.8% month to date. It is up 1.92% year to date and up 10.64% since inception in July 2020.

Mostly Uncle Frank:

Moving to these bread and butter, kindbutter kind of portfolios, first one's, golden Butterfly. This one's 40% in stocks divided into a total stock market fund and a small cap value fund, 40% in treasury bonds divided into long and short, and 20% in gold GLDM. It is down 1.05% for the month of March. It is up 1.49% year-to-date and up 35.91% since inception in July 2020. Next one's the gold and ratio. This one is 42% in stocks divided into a large-cap growth fund and a small-cap value fund, 26% in long-term treasury bonds, 16% in gold, 10% in managed futures and 6% in cash. It is down 2.3% month-to-date for the month of March. It's down 0.60% year-to-date and up 29.17% since inception in July 2020. Next one's the risk parity ultimate. I'm not going to go through all 14 of these funds, but it's down 2.48% month to date. It's up 0.47% year to date and up 21.02% since inception in July 2020. Now, moving to these experimental portfolios that all involve leveraged funds. Don't try this at home, even though I know some of you do.

Voices:

You have a gambling problem.

Mostly Uncle Frank:

First one's the accelerated permanent portfolio.

Mostly Uncle Frank:

This one is 27.5% in a levered bond fund TMF, 25% in a levered stock fund UPRO, 25% in PFFV, a preferred shares fund, and 22.5% in gold GLDM.

Mostly Uncle Frank:

It's down 5.2% month-to-date for the month of March.

Mostly Uncle Frank:

It's up 2.35% year-to-date and up 3.41% since inception in July 2020. Next one's the aggressive 50-50. This is the most levered and least diversified of these portfolios and is paying the price for that. It is one-third in a levered stock fund UPRO, one-third in a levered bond fund TMF and the remaining third in preferred shares, pffv and an intermediate treasury bond fund, vgit. It is down 8.91% month-to-date for the month of March. It is down 8.91% month-to-date for the month of March. It's down 3.03% year-to-date and down 14.6% since inception in July 2020.

Mostly Uncle Frank:

Next one's the levered golden ratio, which we just reformulated last week slightly. This one is 35% in a composite levered fund called NTSX that's the S&P 500 and treasury bonds. 20% in gold that's GLDM. 15% in a international small cap value fund, avdv, 10% in a managed futures fund KMLM, 10% in a levered bond fund TMF, and the remaining 10% divided into two levered value funds, udao, udow and UTSL, which is utilities. It is down 2.5% months to date. It's up 1.58% year to date and down 2.91% since inception in July 2021.

Mostly Uncle Frank:

And the last one and newest one is this Optra portfolio. It's a return stacked kind of portfolio in the modern parlance. It is 16% in a leveraged stock fund UPRO, 24% in a composite worldwide value fund AVGV, 24% in a treasury strips fund GOVZ, and the remaining 36% in gold and managed futures. It is down 3.57% month to date. It's up 0.11% year to date and up 3.03% since inception, july 2024. And that concludes our portfolio reviews of the sample portfolios. As you can see, although the stock market has been doing quite badly, these portfolios are generally holding flat for the year or slightly up, and that is due largely to their diversification into things like gold and treasury bonds.

Voices:

Do you expect me to talk? No, Mr Bond, I expect you to die.

Mostly Uncle Frank:

You know it's interesting. If you compare these kinds of portfolios to a kind of standard stock bond mix, you'll see that these kind of portfolios tend to only have two down years out of 10, so 20% down years, whereas more standard stock bond portfolios tend to be down about 30% of the time, and so there's one year in 10 when these portfolios are up and standard portfolios are down. So far, this looks like this could be that year.

Voices:

Bing again.

Mostly Uncle Frank:

But it's still quite early, it's only one quarter way through the year. But these are basically performing as they have historically in markets like these. But we will be proceeding with monthly distributions next week, which I expect will involve selling a bunch of gold to the extent that cash has not been accumulated to pay these distributions, which it has in about half of these accounts. But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to 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. We are almost finished with all of the emails from January and I hope to be finished with that in the next episode We'll see. 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.

Mary and Voices:

Okay.

Mostly Uncle Frank:

Thank you once again for tuning in. This is Frank Vasquez with Risk Party Radio signing off.

Voices:

Goldfinger. Pretty girl, beware of this heart of gold. This heart is cold. He loves only gold, only gold. He loves gold. He loves only gold, only gold. He loves gold.

Mary and Voices:

He loves gold. I'm sorry, 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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