Mostly Voices [0:00]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer.

Mostly Mary [0:19]

And now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor. Broadcasting to you now from the comfort of his easy chair, here is your host, Frank Vasquez.

Mostly Uncle Frank [0:41]

Thank you, Mary, and welcome to episode 128 of Risk Parity Radio. Today on Risk Parity Radio, we're going to do something we haven't done for a while, which is our monthly rant. Yeah, baby, yeah! I wonder if I can call it a monthly rant if I don't do it every month. I think I can.

Mostly Voices [0:59]

No one can stop me. Just getting warmed up for that. I want you to be nice until it's time to not be nice. Well, how are we supposed to know when that is? You won't. I'll let you know.

Mostly Uncle Frank [1:17]

Now, in the category of it still being time to be nice before we get to the rant, I just wanted to Say that we got back from our trip to the economy conference this past weekend. It was a nice conference. We talked to a lot of people. We had a great breakout session with yours truly talking about withdrawal strategies in retirement. Surely you can't be serious. I am serious. And don't call me Shirley. I also attended a nice breakout session with Sean Mulaney, who is a Tax Guy, if you are a FI enthusiast and need some tax advice, he would definitely be somebody I would look to if you don't have somebody already. I will link to his site in the show notes. He's got a blog and appears on podcasts. I think he was just on the last Choose FI podcast yesterday or a couple days ago. But I think now it's time to not be nice. I can just find that button. And away we go. Today's rant, or this month's rant, is motivated by a report that came out last week from the Death Star. Everything that has transpired has done so according to my design. I should say the Morning Star. Anyway, this report purports to give us the new safe withdrawal rates for the future. It is entitled the State of Retirement Income Safe Withdrawal Rates dated November 11, 2021. And I will link to this in the show notes. It has already been publicized in all the places these things usually get publicized. And the headline is for this report that the safe withdrawal rate is now not 4%, it has to be 3.3% because the Death Star says so. But I wanted to take a look at this and see how they drew these conclusions. So we did take a look at this report. Now, most of this report is actually very well done. I'm talking about the part with the history of it, the part that describes alternatives for withdrawal strategies in terms of using ratchets or guide rails and those sorts of things. Those are very valuable to read. Of course, nobody really cares about that because everybody wants the headline and the guru statement about what we should be doing in the future.

Mostly Voices [4:09]

Bow to your sensei!

Mostly Uncle Frank [4:13]

So we go to section four of this paper, which is entitled what is the Safe Withdrawal Rate for the Future? A Bold Pronouncement from Guru Land. We have been charged by God with a sacred quest. And we'll just read a couple of things here before we get to the Meat of it? I says, Pigpen, this here's a rubber duck and I'm about to put the hammer down. But it says, Many investment firms, including Morningstar Investment Management, provide forecasts of asset class returns, standard deviations, and inflation. Of course such estimates are merely that. Educated guesses about future events. What does that mean?

Mostly Voices [4:58]

Dogs and cats living together. Mass hysteria. That is what we call a crystal ball. My name is Sonia.

Mostly Uncle Frank [5:11]

No organization can claim anything more than partial accuracy for its investment predictions. Actually, you can't even claim that and we'll get to this later. You guys are terrible at doing this. The best of you are terrible at doing this. Can't predict your way out of anything. Forget about it. And I'm gonna prove that by looking at one of your papers from 2011 and we're gonna talk about that. Won't that be fun? Real wrath of God type stuff. Anyway, there is a statement, the next statement here is, forecasts that incorporate current conditions are likely to be more useful than those that rely solely on the past. Actually, that's not true. There is no evidence that you can take today's conditions and use that as some kind of a long-term forecasting mechanism. You'd be better off using past data looking at baseline performances over long periods of time. All right, so they don't really describe exactly what they're doing here. They do say that high valuations as measured by price to earnings or price to book ratios, or the more sophisticated Shiller or CAPE PE suggest that returns will revert to the mean. But such a result is not inevitable. Valuations could remain steep, corporate profits could exceed expectations, and inflation could remain subdued, thereby supporting investor optimism. All right, what do we know about this? We know that there is scant evidence that these ratios revert to any stable mean in any reasonable time frame. This method of predicting things has not worked. Forget about it. Has not worked for at least 10 or 15 years. Forget about it. So if you know it hasn't worked for the last 10 or 15 years, why do you think it's going to work in the future? Isn't that the definition of stupidity? Doing the same thing over and over again and hoping it's going to work better the next time? You could ask yourself questions. Do I feel lucky? Do I feel lucky? Well, do you punk? Because it's not working. It hasn't worked in the past. That statement, revert to a mean, is the problem with that methodology. There is no stable mean that we know about for these things to revert to. That's not how it works.

Mostly Mary [7:44]

That's not how any of this works.

Mostly Uncle Frank [7:47]

All right, then they go on, projecting future results permits the use of more varied portfolios when assessing past performances. The data limitations have been eliminated. Yeah, we're not using data, we're just making it up.

Mostly Voices [7:58]

We're making it up.

Mostly Uncle Frank [8:02]

And we will talk about these shoddy portfolios you've constructed with your made-up non-data. Consequently, unlike the historic portfolios, which only held US assets, the forward-looking portfolios contain foreign securities. Whoop-de-ding! What about the things you did not include? They also incorporate separate estimates for growth and value style equities. And we're going to get to those because those are lots of fun. Funny how, I mean funny like I'm a clown, I amuse you. And then it says in introducing this data, below are the annual return and standard deviation forecasts provided by Morningstar Investment Services for the 30-year performances for each of eight subasset classes. Basically they're making 30 year predictions today as to what's gonna happen with all of these things in the future. This is what you get out of the Death Star. And this is a black box. It is a black Death Star. There's no explanation as to exactly how they did this. It's a trap.

Mostly Voices [9:02]

Maybe they're trying to sell that. I don't know.

Mostly Uncle Frank [9:06]

Anyway, what they come up with is essentially eight crystal balls. Now, I'm not sure which one's the magic eight ball, but I'll describe these crystal balls to you. I think they had Sonia working on this. My name's Sonia.

Mostly Voices [9:20]

I'm going to be showing you the crystal ball and how to use it or how I use it.

Mostly Uncle Frank [9:27]

And we know how much Sonia likes showing you the crystal balls that she's got lined

Mostly Voices [9:32]

up there. As you can see, I've got several here. A really big one here. which is huge. This is the one that I tend to use more often. I have a calcite ball and I have a black obsidian one here.

Mostly Uncle Frank [9:53]

So the first one, which is in fact huge, is the one for large cap US growth stocks. And the crystal ball from the Death Star says that these are going to yield 6.25% for the next 30 years on average.

Mostly Voices [10:09]

You can actually feel the energy from your ball by just putting your hands in and out.

Mostly Uncle Frank [10:14]

The next crystal ball is the one for large cap value stocks. And it says that those are going to yield on average 7.97% for the next 30 or 40 years.

Mostly Voices [10:27]

It's kind of looking at the aura around the ball. See the movement of energy around the outside of the ball.

Mostly Uncle Frank [10:34]

Then we get to the third crystal ball, which is a different color and says something completely different. Now this one says that small-cap growth US stocks are going to have a return on average of 10.17% for the next 30 or 40 years. The crystal ball is a conscious energy.

Mostly Voices [10:54]

The fourth crystal ball says small-cap value stocks are going to yield

Mostly Uncle Frank [10:58]

10.53% for the next 30 or 40 years.

Mostly Voices [11:03]

Now you can also use the ball to connect to the spirit world.

Mostly Uncle Frank [11:07]

And then we get to the fancy foreign stock crystal ball, which says that the estimate there is 8.41% for the next 30 or 40 years on average.

Mostly Voices [11:21]

And it's through the candle that you will see the images into the crystal.

Mostly Uncle Frank [11:30]

We have a couple of bond crystal balls. They're a little bit smaller, a little bit more subdued. They say that US investment grade bonds, we're not sure what those are, they are probably the AGG Barclays index, I would guess. Those are supposed to yield 3.5% for the next 30 or 40 years.

Mostly Voices [11:49]

A crystal ball can help you. It can guide you.

Mostly Uncle Frank [11:53]

And foreign bonds are supposed to also yield 3.3% for the next 40 or 50 years. 30 or 40 years, excuse me.

Mostly Voices [12:01]

Now, the crystal ball has been used since ancient times. It's used for scrying, healing and meditation.

Mostly Uncle Frank [12:09]

And then finally, we have the tiny marble-sized crystal ball, which is just US Treasury bills, which are expected, according to this, to yield 1.71% for the next 30 or 40 years. Okay, somebody didn't coordinate these crystal balls very well. You can't handle the crystal ball. Think about this. If you take these together as the truth, as the prediction for the next 30 or 40 years, it is saying that small cap stocks are going to be 60% 60 60% Better than large cap stocks on average every single year for the next 30 or 40 years. Does that make any sense? Forget about it. No, it doesn't. Forget about it. Typically, the yields on these things over long periods of time are within a percentage or two. We know that small cap value stocks historically have performed better than the rest of the market, but not 60% better. Come on. That's not an improvement. This doesn't pass the smell test. It doesn't pass the laugh test. Don't be saucy with me, Bernaise. It's not even funny. Funny how? Okay, so they're juggling these crystal balls. They say completely inconsistent things that can't exist together in the real world. And then what do they do? Then they create the monkey portfolio. What is this monkey portfolio they've created? They've decided that their sample portfolio, the one that they're going to use to make these projections, has mostly the worst stuff in it. So the worst stuff they've come out with. Let's go with the worst stuff and let's say 60% of our stocks are going to be in the worst stuff, even though we know because we're gurus that the small caps are going to be yielding 60% more on average than the large caps. We're gonna go 60% of our stocks in the large caps and 20% in the small caps. And we'll just throw in 20% in foreign stocks. And that is the stock allocation that is used. Now, if you could predict with your crystal ball That certain classes of stocks were going to perform 60% better than other classes of stocks. Why would you not tilt towards those? Your portfolio construction does not match what you say is going to be the future. Only an idiot would use this portfolio construction given your belief in your predictions for the future. If you believe in your crystal balls, then you have constructed the stupidest portfolio on Earth.

Mostly Voices [15:18]

Everyone in this room is now dumber for having listened to it. Did you get it? Did you get the memo?

Mostly Uncle Frank [15:22]

Hello? Hello, anybody home? Huh, think McFly, think. So of course it's going to perform badly. Of course it's going to be less than a 4% withdrawal rate. 'Cause you're using a worst portfolio you could come up with.

Mostly Voices [15:40]

Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys? Come on, man.

Mostly Uncle Frank [15:44]

I'm sure if you actually believed your crystal balls and oriented your portfolio, just reversed the large caps and the small caps in terms of how much of your portfolio is devoted to each one and pick the one that was supposed to perform 60% better on average for the next 30 or 40 years. then you probably have something that yields a safe withdrawal rate of over 4%. But we don't know how you did it. All we know is that you came up with an idiotic combination of stuff using crystal balls that don't even match like they're in the same universe. This is the definition of garbage in and garbage out. You cannot get any useful predictive thing out of this kind of analysis. None. Forget about it.

Mostly Voices [16:38]

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

Mostly Uncle Frank [16:45]

What's even more galling about this nonsense is you don't even rely on your own research to construct portfolios. On March 31st of this year, the Death Star produced a very nice report about the diversification landscape that was based on actual data. And what did that say? It said that the most diversified things from stocks are treasury bonds and gold. I do not see you constructing any portfolios here based on that information that is based on data that we know that is true. Now, if you can't even use your own research properly, Where are we? Why are you even doing this? I'll tell you why you're doing this because I see it every time somebody comes out with an annuity or a structured product. They take out one of these reports. They take out the Death Star report. This helps financial advisors sell crap. What it helps them sell is annuities and structured products. They use this to say, oh, look, the world is ending. Everything's going to be horrible in the future. But I can save you if you pay a lot of money for my stupid structured product or annuity. That's how this is used. Geez. That's what we see. That's the headline.

Mostly Voices [18:08]

I said consummate these, consummate.

Mostly Uncle Frank [18:12]

And you wonder why do-it-yourself investors do not trust the financial services industry. It's right here in black and white.

Mostly Voices [18:19]

Get them to sign on the line which is dotted. Stop trying to drink our milkshakes.

Mostly Uncle Frank [18:25]

I drink your milkshake.

Mostly Voices [18:31]

I drink it up. You haven't earned it.

Mostly Uncle Frank [18:38]

Am I right or am I right or am I right? Right, right, right. Start using the data that you know to be true from your own reports to construct Better portfolios that will perform better in the future. If you can dodge a wrench, you can dodge a ball. Higher returns and lower volatility. And if you really believe your crystal balls, then act like you believe your crystal balls and tilt that portfolio towards small cap stocks. I wouldn't make that prediction. I would say you'd be well advised to have half of your stock part of your portfolio in small cap stocks or reits or something that's going to be diversified, diversified from the rest of your stock portfolio. Bueller, Bueller. But if you want to pretend that you're incapable of constructing a good portfolio, you can go off and do that. Just don't expect us to buy into that. Here's what historically we actually know to be true about this. What we know is this：if you are paying 1% to a financial advisor, you better reduce your safe withdrawal rate or projected safe withdrawal rate by at least a half a percent. And we know this because it's in your own paper on page 7 at the bottom of the page. In a 2001 article in the Journal of Financial Planning, George Pye found that paying a 1% expense ratio for investments translated into a 0.5% reduction in safe withdrawal rates. So that's the truth. You cost too much, you're the problem, not the portfolio. You are the problem, your fees are the problem, not the portfolio.

Mostly Voices [20:23]

I says, Pig Pen, this here's a rubber dube. We just ain't going to pay no toll. So we crashed the gate doing 98. I says, let them truckers roll 10-4. The other thing we know, For certain is that you guys can't predict this. You can't predict your way out of a paperback.

Mostly Uncle Frank [20:42]

And we know that because we can look at your track record. And I will link to this in the show notes. It is an article called youd Forecasts for Stock and Bond Returns from Morningstar dated October 30, 2011. October 30, 2011. 10 years ago, 10 years ago, what were you predicting? Did it come true? Was there any validity to what people were predicting? Let's take a look and see. All right, Jack Bogle came up with a reasonable prediction, conservative prediction. He basically said it's reasonable to expect stock returns in the range of 7% for the next 10 years. That's not so far out of line and he didn't say small caps are going to be 10% and large caps are going to be 6% which would have been wrong anyway. He didn't go too far out of line. He just did what most people do. They want to err on the conservative side. That's fine. That's fine for discussion purposes. But then we have other people saying, There's going to be a drag in the US economy because of the debt burden. However, this will be offset by the growth in the global economy. What actually happened in the last 10 years? The US economy did great. The global economy didn't do so well. That was exactly wrong. Another one points out, the latest projections from Jeremy Grantham at GMO for seven-year annualized returns are 5.6% nominal, 3.1% real returns for US large-cap stocks and 1.3% nominal or -1.2% real returns for US bonds. John Hussman comes to similar conclusions. These three are smarter and have thought a lot more about this than me. So this one person saying I'm being completely unoriginal predicts 6% nominal for US stocks and 2% nominal for US investment grade bonds over the next 10 years. Now, of course, all of those predictions were wrong. They all turned out to be wrong. And it's not because they didn't try. It's not because they're not smart. It's not because they were not able to come up with a methodology to make predictions. It's just that it can't be done. That none of this should be taken as an actual valid basis for making any decisions whatsoever, including Morningstar's new report, which is the same Same old, same old, same old, same old. To come up with some conservative assumptions which help market financial products.

Mostly Voices [23:24]

Always be closing. As opposed to just looking at data.

Mostly Uncle Frank [23:29]

So, they're all wrong. Then why were they wrong then? Why were they wrong about the last 10 years? Maybe this is part of the problem. Another commenter on here, somebody else was less optimistic than Bogle. He agrees that the Shiller PE, which Bogle used to anchor his predictions, is a valid starting point. The Shiller PE has quite a good record of predicting the annualized return of the index for the next decade, but not a good record for predicting one or two's worth of returns. Wrong! Actually, that's not true. It actually has a terrible record, and we know this for certain now. It can't predict things over 10-year time frames. Maybe it could predict something over 20, 30, 40-year time frames, but probably not. And the problem with it is it assumes there is a stable mean for this stuff to revert to. There is no stable mean. There is no invisible magic PE hand that pushes the stock market down when the PE is high, or pushes the stock market up when the PE is low. It doesn't exist. What's gonna happen is there are going to be varying conditions that we can't predict that will ultimately determine how well the stock market performs. And looking at the PE ratio now is really not going to tell you, it's not going to give you a basis to make a decision for the future. It's the mistake You made in 2011, it was wrong. Wrong! Wrong! Wrong!

Mostly Voices [25:05]

Wrong! Wrong! Wrong! Right? Wrong! Wrong! Why are you doing it again and hoping for a different result?

Mostly Uncle Frank [25:14]

Why are you doing this again and hoping for a different result? You're not going to get it. Man's got to know his limitations. If you Are correct. It's going to be random chance. Just random chance. You could ask yourself a question.

Mostly Voices [25:36]

Do I feel lucky? Because it's already failed.

Mostly Uncle Frank [25:41]

It's done. Forget about it.

Mostly Voices [25:45]

Forget about it.

Mostly Uncle Frank [25:49]

And then here's another laughable predictor from 2011 saying that, oh, we're in a secular bear market now, so we're not going to see returns or the stock market exceed its peaks in 2000 or 2007. And of course, that is somebody who is looking backward a short period of time and literally projecting into the future. That doesn't work either. That doesn't work either. Forget about that too. Forget about it. So it's always so funny because people never go back and ask whether the people making the predictions have any track record of being able to predict anything. The best thing about this little article from 2011 though is the last heading which says a Shattered Crystal Ball. Yes indeed a shattered crystal ball. And here are the best quotes and only useful quotes out of this predictathon that they were holding in 2011. One of them pointed out the difficulty. Some may say the folly, yes, it is the folly, of attempting to predict market returns. One of these predictors said, as Yogi Berra said, it's hard to forecast, especially the future. Another one said, I dropped my crystal ball on my foot the other day. Now I have a fat toe and a shattered crystal ball. The thing was no good for anything anyway. I think predicting gains for the next decade is fun, but of little real value. New forces are gaining ascendancy in the markets, among them flash trading and ETFs. These forces are ushering in even more uncertainty than we've seen before. Another quote, I think the smartest bet is not to make a big bet based on these numbers. The market routinely makes fools of smart people. These projections could be easily very wrong, as they all were.

Mostly Voices [27:56]

Wrong!

Mostly Uncle Frank [28:00]

This report is in fact all indicative of all that is unholy about the financial services industry and the financial press. Coming out with ridiculous crystal ball predictions with no backup work that don't even internally make sense, using bad portfolios as the base to try and say the world is ending in some way, because then it allows them to say and market on fear, uncertainty and doubt. The world is going to be horrible in the future. Why don't you come in here And I'll give you some nice, expensive financial products.

Mostly Voices [28:40]

I drink your milkshake. I drink it up.

Mostly Uncle Frank [28:48]

But I think that's probably enough ranting for one day. And this death star probably has exploded by now or is getting close to it. And I do see that our signal is beginning to fade.

Mostly Voices [29:01]

Huh? What do you mean they blew up the Death Star? Oh, who's they? What the hell is an aluminum Falcon? Oh, oh, oh, I'm sorry. I thought my dark lord of the Sith could protect a small thermal exhaust port that's only two meters wide. That thing wasn't even fully paid off yet.

Mostly Uncle Frank [29:29]

If you have comments or questions for me, you can send them to frank@riskparityradio.com that email is frank@riskparityradio.com or you can go over to the website www.riskparityradio.com and fill out a contact form and I should get your message that way. We will pick up this weekend hopefully with some more emails since we're perpetually behind, and of course our weekly portfolio reviews of the seven sample portfolios that you can find at www.riskparityradio.com and we are actually trying to construct portfolios that do well here, not trying to construct bad portfolios. Yes! If you haven't had a chance to do it, please go to your podcast provider, and give this podcast some stars, some likes, some subscribes, a nice comment, if you like it. Hopefully you do. That would be great. Mmmkay. Well, thank you once again for tuning in.

Mostly Mary [30:38]

This is Frank Vasquez with Risk Parity Radio signing off. For mercy sakes alive, looks like we got us a convoy. The Risk Parity Radio show is hosted by Frank Vasquez. The content provided is for entertainment and informational purposes only. and does not constitute financial, investment, tax, or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here, making sure to take into account your own personal circumstances.