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 [0:36]

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 first episodes where we did our introductions of the various topics. And those episodes are episode 1, three, five, seven, and nine. And so if you go back and listen to those, it will get you up to speed. And now on to episode 139. Today on Risk Parity Radio, we have a cornucopia of listener questions.

Mostly Voices [1:17]

And so without further ado, here I go once again with the email.

Mostly Uncle Frank [1:22]

And First off. First off, we have an email from Adam. And Adam writes, hi, Uncle Frank.

Mostly Mary [1:29]

I hope you are doing well. I was interested in your opinion on withdrawal strategies in retirement as they relate to using risk parity portfolios. More specifically, are you familiar with either the variable percentage withdrawal or the amortization based withdrawal approaches for determining an appropriate percentage to pay yourself each year in retirement? I have been playing around with the Bogleheads ABW calculator, and in general, I like how this approach provides some guidance for how much to withdraw each year in retirement while allowing consideration of life expectancy. This approach seems to eliminate the risk of portfolio depletion while simultaneously reducing the risk of underspending one's portfolio as well, assuming one isn't intending to leave behind an exceptionally large pile of money after death. As I understand it, The downside to these withdrawal strategies is the potential volatility in retirement withdrawals from year to year based on whether the values of one portfolio swing significantly up or down from year to year. It seems to me that risk parity portfolios are a fantastic response to mitigate this downside since overall portfolio volatility and drawdown depths and durations should be significantly less than portfolios that don't exhibit risk parity characteristics. My tentative and eventual plan is to use my Risk Parity Portfolio, the upsides and downsides of which you reviewed way back in episode 87, along with an amortization-based withdrawal approach when the time comes to semi or fully retire within a couple of years or so. Any additional thoughts, considerations, or concerns would be greatly appreciated. P.S. I always laugh when you use the milkshake sound bite from There Will Be Blood.

Mostly Voices [3:09]

Well, Adam? If you have a milkshake, and I have a milkshake, and I have a straw, there it is. That's a straw, you see. Watching. And my straw reaches across the room and starts to drink your milkshake. But yes, I am familiar with these theoretical approaches to withdrawal strategies.

Mostly Uncle Frank [3:44]

And you can actually model these at Portfolio Visualizer as well. If you use their Monte Carlo simulator, it gives you an option or several options for how you take withdrawals and the life expectancy is one of those options. Another way I've heard of people doing this is actually looking at the tables that the IRS provides for required minimum distributions because they are also based on life expectancy. But I did go ahead and run a sample of this at Portfolio Visualizer using a golden ratio kind of portfolio. And it does look a little strange. The portfolio continues to grow with smaller withdrawals to begin with, but then towards the end of life, the withdrawals get very large in the portfolio. begins to decline. Of course, it never runs out of money in these simulations. So it works as far as the theory goes, but the problem I have with a withdrawal strategy like this is it doesn't really seem to match up with the practical realities of life. Because in fact, most people are going to be spending more near the beginning of their retirement and the middle of their retirement and a lot less towards the end assuming they live into their 90s. So where you end up as a practical matter, and this is kind of true of all theoretical versus practical, no matter what theoretical drawdown strategy you take, it's always based on the amount of the portfolio. In real life, your expenses are your expenses, and they can be adjusted through time, through your retirement. And so really what happens is you try to accumulate enough that you can reasonably cover the expenses. And then as you go forward, you adjust the expenses based on what's going on in your life and based on how much your portfolio is going up and down are the two main ways. And that's what Bill Bengen suggested back in his 1994 paper that the best way to deal with reality is to make adjustments as you go and not lock yourself into some kind of theoretical framework that requires you to spend money that you don't need to spend or won't allow you to spend money when you do need to spend it. So the way I tend to look at this is that I want to be able to spend up to 5% a year of my portfolio in terms of what my expenses look like. I want to keep what I would call the KLO or keep the lights on expenses to 3% or less. That's just you living in whatever house or apartment you're living in, paying your utilities, and all the basic needs you have in life. Then I'd like to spend another 1% on things that make our lives more comfortable. Going out to eat, having a few little trips here and there, getting somebody to do the yard and clean the house and free up my time to do other things like this podcast. Yes! And then I'd like to have another 1% available for just extravagant expenditures, big vacations, big family events, You could include things like buying a boat if you were into that kind of category. And what we see in our own lives is we still have expenses related to our children. We still have a child in college. And so there are expenses there that we're having now that we will not have in a few years, hopefully. That's not how it works.

Mostly Mary [7:08]

That's not how any of this works.

Mostly Uncle Frank [7:12]

So where I ultimately come out is this：you should construct a portfolio and should model it in a way that it survives under theoretical circumstances, whether you're using a straight 4% rule, life expectancy tables, or some other method. But after you know that and you have looked at what your actual expenses are, then you're really going to manage your retirement based on your actual expenses and projected expenses more so than looking at just the total amount in your portfolio. chances are in most circumstances your portfolio is going to grow and will end up being bigger than you need, in which case hopefully you can just increase your spending. It's only when you have those bad sequence of returns risk right at the beginning of your withdrawals that you get to these theoretical bounds for failures of portfolios. I will also link to the retirement spending calculator that is at Portfolio charts, which I think is a nice theoretical calculator to use because it gives you a lot of different options for varying the kinds of withdrawals you have and putting things on bands, if you will, or ratcheting things up if you're making more money. And I also did a tutorial about that on the YouTube channel, one of our three tutorials so far. And so if you want to take a look at that, I'll also link to that in the show notes. It'll show you how to use that. Calculator and what you might do with it. But thank you for that email.

Mostly Voices [8:47]

I drink your milkshake. I drink it up.

Mostly Uncle Frank [8:57]

Second off, we have an email from Amit and Amit writes.

Mostly Mary [9:02]

Hi Frank, why do you have a different withdrawal rate for each fund? I understand they each have different return and volatility expectations, which means some can theoretically tolerate larger withdrawals. But if you don't have consistent rebalancing frequency and withdrawal rates, there's no way to do a proper apples to apples comparison. Obviously, risk parity and low vol strategies are generally most relevant for retirees attempting to maintain their wealth throughout retirement. In this case, showing how portfolios function through withdrawals is super useful. However, for those of us early in our careers in our accumulation phase, we are actually making deposits every month. In this case, it's oftentimes the high vol strategies that lead to higher geometric returns because you can buy the dip. I think it would be interesting if you ran the portfolios under both conditions. Basically, you'd have two accounts for each portfolio. In one, you withdraw each month, and in the other, you deposit each month. That would track what the dynamics are for how one should invest during retirement versus accumulation. Thanks for all the great work. Best, Amit. All right, here are some interesting questions.

Mostly Uncle Frank [10:10]

Why do we have different withdrawal rates for each portfolio? Well, the withdrawal rates are designed around the risk profile of these portfolios. And basically, you're looking at three kinds of risk profiles here. The most conservative profile would be a portfolio like the All Seasons or something else that has a very low percentage of stocks in it and is mostly fixed income. With that portfolio, you don't worry about the stability, you worry about whether it's going to grow enough, and you would be subjecting that to a relatively low projected safe withdrawal rate. Then the next three portfolios, which are the Golden Butterfly, Golden Ratio, and Risk Parity Ultimate, are designed to have the same kind of risk reward characteristics as a traditional 60/40 stock bond portfolio. So now that portfolio, a traditional 60/40 is designed to withstand safe withdrawal rates of 4%. What we want to do here is show that these portfolios that we are constructing are more robust. So we apply a 5% rate to the golden butterfly and golden ratio and we go up to 6% for the risk parity ultimate.

Mostly Voices [11:24]

What we do is if we need that extra push over the cliff, you know what we do? Put it up to 11. 11, exactly.

Mostly Uncle Frank [11:31]

And the purpose of that is to provide some real time stress testing for these things. These go to 11. Now, when you get to the experimental portfolios that we have, you are talking about portfolios that have the same kinds of risk characteristics as a 100% stock portfolio or something that's at least 80% in stocks that's going to be aggressively positioned. Real wrath of God type stuff. And with the first two of those, the accelerated permanent portfolio and the aggressive 50/50, those have about 200% in terms of leverage in them or a little bit more.

Mostly Voices [12:07]

Fire and brimstone coming down from the skies.

Mostly Uncle Frank [12:11]

So we just decided to double the safe withdrawal rate from 4% up to 8% for those.

Mostly Voices [12:17]

You can't handle the- Dogs and cats living together.

Mostly Uncle Frank [12:21]

And again, the idea is to stress test them at a high rate of distributions. For the last portfolio, the levered golden ratio that has an amount of leverage that is essentially equal to about 1.6 to 1.

Mostly Voices [12:37]

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

Mostly Uncle Frank [12:41]

And so we just went ahead and used 7% for a withdrawal rate for that one. Again, designed to stress test the portfolio in a real time kind of way, given what we expect the risk reward characteristics to be. Now, as for your suggestion that I run these as accumulation portfolios, I think I'm going to decline that.

Mostly Voices [13:06]

Let's face it, you can't talk them out of anything. For a couple of reasons.

Mostly Uncle Frank [13:09]

First and foremost, I am retired. And I need to have this podcast fit within a certain amount of time and effort as far as I'm concerned. And so doubling the work in terms of the portfolios would not make my life any easier. Forget about it. And I think it would just add confusion actually.

Mostly Voices [13:29]

Forget about it.

Mostly Uncle Frank [13:32]

Second, I don't think you actually need me to do this because you can kind of do it for yourself. And instead of providing you with some fish, Let me teach you a little bit more about fishing here. Bow to your sensei. Bow to your sensei. And you'll see how you can use the tools that we have available to simulate these things and then run them for yourself if you wish to do that. Now, as I've said many times in the past, for people in their accumulation phase, they should start with 100% stock portfolio and live with that for as long as they can. knowing that they're going to ride through some large drawdowns over decades. And there are many ways to construct those kind of portfolios. We know from our macro allocation principle that any reasonably well diversified 100% stock portfolio is likely to perform about 90 to 94% the same as any other reasonably well diversified all stock portfolio. And this comes from chapters 18 and 19 of the Book of Jack, Common Sense Investing by Jack Bogle. So what that means in practice is that really the only ways of beating the stock market, if you will, are to take a concentration in something you think is going to do better than the stock market. Man's got to know his limitations. And if you can do that, more power to you. The other way is to add leverage to a portfolio, which is why some of these experimental portfolios may be of some interest, at least for part of your accumulation dollars. Now, there's a very good YouTube video about leverage in portfolios by Ben Felix. I'll link to it in the show notes. It's about 13 minutes long and is common sense investing videos. But in that and in some of his other podcasts, he does note that there is academic research that suggests that adding some leverage to portfolios is a better way of trying to get a better return than trying to focus on a particular concentration and guessing at what's going to do well next. I think I've improved on your methods a bit too. But we can run these simulations. with simulated deposits into a portfolio over at Portfolio Visualizer. And I have constructed a three portfolio analysis for you to look at that I will link to in the show notes. And let me just describe what's in this. The first portfolio that I'm using in there is a leveraged portfolio. It's the same portfolio that I gave to the Choose FI guys for their M1 page. of a sample levered portfolio. And it is 26% in UPRO, 26% in TMF, that's the Leverage Stock Fund and Leverage Long-Term Treasury Bond Fund. And then the remaining 48% is divided into 12% each of a small cap value fund, a preferred shares fund, a gold fund, and an intermediate treasury bond fund. And so I'm using that as portfolio one for this simulation. The next portfolio is one that I suggest is decent for accumulation, which is half small cap value and half large cap growth. And so that's a 50/50 portfolio of those two things. And then as the third portfolio we just took the Vanguard 500 Index Investor, basically the S&P 500 for that. And we ran this simulation starting with $1,000 at the beginning of the period these funds only go back to 2009, so that's what we had to work with. But we started with $1,000 and then simulated putting in $1,000 every month into these portfolios. And you'll see how the growth varied for the three portfolios. And I'll just give you some summary statistics that you can look at for yourself. The leveraged portfolio that we put in there did the best. It had a final balance of $616,000. Initial balance of $1,000 with $1,000 a month. Compounded annual growth rate of 67.77%. Standard deviation of 14.7%. Best year was 49%, worst year's minus 8%. This is a very good period for these kind of portfolios, any stock-based portfolio. But it ended up with a sharp ratio, which is this risk reward metric of 1.37. Now, if we compare that to the basic accumulation portfolio, the one that was composed of just the two funds. That one did better than the S&P 500 portfolio, but it had a final balance of $479,966. Compound annual growth rate of 64.41%. Best year of 36% worst year of minus 8%. And then the standard S&P investment would have grown to $457,000. had a compound annual growth rate of 63.78, best year of 32.18, worst year of -4.5. It was interesting that for this period the S&P 500 portfolio actually had a higher Sharpe ratio than the basic accumulation portfolio of the two funds. It was 1.11 versus 1.00, but both were lower, obviously, than the leveraged portfolio that I described. But you can go over there and run any kind of simulation like this that you wish to run with any kind of portfolio that you wish to run it. All you need to do is just adjust those starting metrics as to how much money it starts with and then how often the deposits are going in and how much the deposits are. We had the tools. We had the talent. And I think if you do that, you will find the information that you seek. And then you can also set up your own portfolios and see how they work in real time. One of the advantages we have today is that we have no fee trading and can buy fractional shares. So you can have a portfolio that's only $1,000 to start with, for instance, or less. That would cover whatever you wanted to cover. We really couldn't do that before, say, 2019. But now it's all available for you. But what's easy to do is what? Easy not to do. And just one note, these are not recommendations I'm making, but just simple information I'm providing you, and hopefully this will put you on a trajectory where you can figure some of this out for yourself. Bow to your sensei. But thank you for that email. And our next email comes from Jeffrey.

Mostly Mary [20:23]

And Jeffrey writes, Frank, in doing a deep dive on Harry Brown's permanent portfolio, I noticed he stated that you want to hold stocks for times of economic growth. He also stated that you want to hold the most volatile assets. That is why you use long-term treasuries for rebalancing. Given all of that, would it not be more prudent to use a growth fund ETF for the stock portion of the risk parity portfolio? Maybe something like Vanguard 1000 Growth ETF, VONG, which has left the S&P 500 in the dust over the last decade. My reasoning would be that if the economy was ever such that value stocks like consumer staples and utilities were the biggest movers in the stock market, chances are we would be in a lower growth environment where we would be expecting other assets in the portfolio like treasuries to be picking up the slack anyway. Thanks, Jeffrey. Well, let's start with Harry Brown's portfolio or his permanent portfolio.

Mostly Uncle Frank [21:19]

You might want to go back and listen to, I think, episodes one, three, and five, where we talk about the history and development of this style of investing. And Harry Brown was one of the early people who came up with the idea of putting different kinds of investments that were severely uncorrelated to deal with different kinds of economic environments. Unfortunately, he didn't have the data that we have today or that Ray Dalio put together later. And so he was just kind of guessing as to what would work and how much of it would work. And so the portfolio that you end up with there is kind of misproportioned, if you will. As to your more specific questions, let's talk about what kinds of funds to use in these kinds of portfolios. You do note that Vanguard 1000 Growth ETF has left the S&P 500 in the dust over the past decade. And those are the operative words over the past decade. This has been a great decade for growth stocks. Not all decades are like that. In particular, if you go back to the 1970s or the 2000s, they were terrible for growth stocks. And what you wanted to have in those time periods were value stocks. And I think you may have a misperception as to what kinds of stocks are value stocks.

Mostly Voices [22:37]

I don't think it means what you think it means. Value does not mean low volatility.

Mostly Uncle Frank [22:40]

So it's not just consumer staples and utilities. You might have some of those, but what you'll find in value funds is a lot of financials, banks and insurance companies. You'll find things that are energy and commodity producers. You'll find your big industrials. All of those sorts of things are really what are termed value stocks. because they have low PE ratios most of the time that are lower than your high flying tech stocks which end up having very high PE ratios based on their expected growth. So where your value stocks do extremely well is actually in inflationary environments like the 1970s along with REITs and commodities themselves. And that period is a stark contrast to what we just saw in the past 10 years because in that period you saw what was called the Nifty 50, which were the growth stocks of the era. Basically tank in '73, '74 and never really recover for the rest of the decade. In the meantime, on the value side of things, those stocks took off. And so a small cap value fund from 1975 up to 1987 didn't have a down year through that entire inflationary period. And so that's why you would be holding something like that. because also in that period, you saw long-term treasury bonds struggle. So if you had a portfolio that was only long-term treasury bonds and growth stocks back in the 1970s, it wouldn't have done so well. And again, for the theory of this, do go back and listen to episodes one, three, five, seven, and nine in particular, where we do talk about the theory behind risk parity is that you have different kinds of economic weather that you need to deal with. And there are basically four types. You can have increasing growth in the economy and increasing inflation, decreasing growth and decreasing inflation, which are your big recessions like 2000, 2008, and the mini one we had in March of 2020. Or you could have increasing inflation and decreasing growth. That's a 1970s scenario. or increasing growth and declining inflation, which is like the past 10 years. And in each of those quadrants, you see different kinds of assets doing well. So the idea for a complete risk parity style portfolio is to have assets in the portfolio that cover all four of those quadrants in proportions that make sense given what their returns and relative volatilities are. Where you come out with that is you don't want to have a stock portion of your portfolio that is only large cap growth. You do want some things like REITs in there. You do want some things like small cap value in there. You could have other things like utilities, but that's just another variation on the theme. So while you might have a concentration in growth in an accumulation style portfolio, Once you get to the decumulation and you're really looking to maximize the diversification there, you really want other things besides growth in the stock portion of your portfolio.

Mostly Voices [25:56]

You need somebody watching your back at all times.

Mostly Uncle Frank [26:00]

Well, thank you for that email. Last off. Last off, we have an email from Kevin and Kevin writes.

Mostly Mary [26:08]

Loved the newest episode, giving the people what they want. More Cowbell. Seriously though, keep up the good work. I've learned a ton from your show. Every episode has a new nugget of wisdom. Thanks for all you do.

Mostly Uncle Frank [26:21]

Well, what can I say, Kevin?

Mostly Voices [26:25]

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

Mostly Uncle Frank [26:29]

I'm glad you're learning a lot from this show, finding some nuggets of wisdom and enjoying the additional theatrics, if you will. I gotta have more cowbell. I gotta have more cowbell.

Mostly Voices [26:41]

And so thank you very much for that email.

Mostly Uncle Frank [26:45]

But now I see our signal is beginning to fade.

Mostly Voices [26:49]

Turn those machines back on. Turn those machines back on.

Mostly Uncle Frank [26:56]

If you have comments or questions for me, please send them to frank@riskparityradio.com that email is frank@riskparityradio.com Or you can go to the website www.riskparityradio.com and fill out the contact form there and I should get your message that way. If you haven't had a chance to do it, please go to your podcast provider and like, subscribe, give me some stars, a review. That would be great. Mmmkay? We'll pick up this weekend with our portfolio reviews, not only for the end of the week, but also for the end of the month. And a little bit about the end of the year. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Voices [27:43]

I'm telling you, fellas, guess what? I got a fever. And the only prescription is more cowbell.

Mostly Mary [27:51]

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.