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 [0:37]

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 1-3, five, seven and nine. And so if you go back and listen to those, it will get you up to speed. But now on to episode 143 of Risk Parity Radio. Today on Risk Parity Radio, we're going to try and finish our emails for December so we don't get too far behind. But we did have somebody go to the front of the list today. One of our patrons from Patreon.

Mostly Voices [1:29]

We few, we happy few, we band of brothers.

Mostly Uncle Frank [1:34]

Dominic decided to write in with a question. A question?

Mostly Voices [1:37]

Since before your sun burned hot in space and before your race was born, I have awaited a question.

Mostly Uncle Frank [1:49]

And so since he is our longest time patron, I believe, or one of them, he gets to go to the front of the list. If you want to join that club, we happy few. You can do that at the support page at www.riskparityradio.com and all of that money goes to our designated charity for this podcast, which is the Father McKenna Center. But without further ado...

Mostly Voices [2:17]

Here I go once again with the email. And...

Mostly Uncle Frank [2:22]

First off, we have that email from Dominic. And Dominic writes...

Mostly Mary [2:30]

Hi Frank, I'm trying to implement a golden butterfly-like portfolio. My assets are approximately one-third in a work 401 account in which only mutual funds and not ETFs are allowed. Another one-third is in self-directed 401 s and Roth IRAs, and the last one-third is in a taxable brokerage account. Can you please comment on optimal asset placement and how to negotiate rebalancing given these constraints? Thanks. I'm happy to be an early Fanboy patron.

Mostly Uncle Frank [3:00]

Yeah, baby, yeah! All right, just taking a look at this situation, I think what you want to do first is take a look at what sort of funds are available. In that 401 account, I would expect you're likely to have some kind of S&P 500 or total market fund that is relatively inexpensive. You might have a small cap value fund, which would be nice. It is doubtful you have a gold fund. It is doubtful you have something devoted specifically to long-term treasuries. There might be something devoted to short-term treasuries or something close to it. But generally what you want to put in there are high risk assets, high risk, high reward assets, which is probably going to be mostly that S&P 500 or total market fund. I'm just guessing because I don't know what's available in your 401k. But you could put the whole 20% allocation of that in there if that makes sense and then see what else you can use to deal with the other 13% that needs to reside in there. I think the next consideration is what to do with that 20% of the golden butterfly that is in short-term bonds or cash equivalents is really what we would call that more broadly. To me, it seems like that really belongs in your taxable brokerage account for a couple of reasons. First of all, you could expand that out as to what that allocation is actually in and what I'm thinking of. You could put some of that allocation in I bonds, for example, which you are not going to be able to do in the retirement accounts, but are paying a healthy rate of interest these days and probably will for some time in the future and carry virtually no risk of going down. Second, to the extent you have an emergency fund that is separate from what you're doing here, you can probably just fold it in to this allocation because it is appropriate to hold emergency fund type assets in a short-term bond account, which is very liquid and very stable. And also from the tax side of this, it's not going to generate that much income. So although it's going to be ordinary income, it's just not going to be that much. So this may actually give you some more flexibility overall for your entire financial picture. And then you're dealing with your most flexible account for allocation purposes, which is that Roth IRA, both because you can access the contributions to it and because you can also do transactions in it without incurring any capital gains or transaction fees. So you can put your most risk return oriented assets in there, such as your small cap value funds. A lot of what goes in there is going to depend upon what you can actually put into that 401k account and what's available there. And then I would spread the gold and long-term treasuries into these spaces, whatever space is left really, with interest rates as low as they are, you're not going to be generating a lot of taxes in connection with the income that's paid by those long-term treasury bonds. You would if there was a stock market crash and those went up substantially, incur some capital gains if you holding those in your taxable account and you sold them. On the other hand, if you've already got some of those also in your 401k or your Roth IRA, then maybe you can just do the transactions in those accounts, not do the transactions in your taxable account and avoid any kinds of capital gains taxes that might be accrued if you were to do the transactions in a taxable account. So having some of those other assets in different places in those accounts, may be ultimately advantageous for management purposes, giving you more options down the road as to what needs to be sold and what needs to be bought at rebalancing time. Eventually you will be rolling that 401k into an IRA with all the choices for assets that you would want, and then you'll have even more options. But as to where you are right now, I would start with what you can do in the 401, go with the short-term bonds in the taxable, and then distribute the other ones where the availability arises, keeping most of the small cap value in the retirement accounts. I hope that's helpful and thank you for that email. Second off. Second off, we have an email from Javier, and Javier writes.

Mostly Mary [8:11]

Hi, Frank. Thanks for the great podcast, the serious and the fun parts. I'm still in the accumulation stage, 12 to 15 years to go, and after being self-employed for most of my life, I now have access to a 401. I'm contributing all the pre-tax money allowed by the IRS and currently invest 100% in US equities. My 401 investment options are very limited, and I currently only invest in mutual funds based on the S&P 500 50%, S&P 400, mid-cap 20%, and the Russell 2000, 30%. I also have access to an MSCI ACWI ex US Index, a US AGG Bond Index, a short-term, and TIPS indexes. Question, would you stay the course or would you incorporate bonds to this portfolio and how much? Thanks again and please continue sharing your wisdom.

Mostly Voices [9:05]

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

Mostly Uncle Frank [9:08]

All right, the first thing I think you need to do is manufacture yourself some more investment options. And the way you do that is by creating an IRA and putting some money into it. So if you could swing it, you would continue to make all the investments you're making in your 401k. and then also make a $6,000 investment into an IRA, whether that's a regular IRA or a Roth IRA depends on your tax rates. And since you haven't mentioned what your income is, it's kind of beyond the scope of this discussion, but that will give you a lot more options in terms of what you can put your money into going forward. If you are getting a match in that 401k, you would contribute up to the amount of the match you get for the 401k, then essentially switch to the IRA, fill that up, and then go back to the 401k and fill the rest of that up. That would be your order of operations. If you are not getting a match in the 401k, then your priority should be to fill up the IRA first and then go back and fill up the 401k as much as you can. But if you open up an IRA at one of your typical places like a Fidelity or a Schwab or a Vanguard, go for their regular brokerage option for your IRA. You can invest in ETFs, for example, at Fidelity with no fees and fractional shares and essentially buy whatever you want. And that's the place you want to be going forward or a place like that so that you can easily change your allocations when you go from an accumulation portfolio to a decumulation portfolio. As for your investment options in terms of these stock funds, you have a 100% equity portfolio with four funds as your options. S&P 500, S&P 400, Russell 2000, and the MSCI ACWI ex US index, which is basically A global fund that excludes US shares. Around here we follow the macro allocation principle. No more flying solo.

Mostly Voices [11:28]

You need somebody watching your back at all times.

Mostly Uncle Frank [11:32]

And this comes from the book of Jack, Common Sense Investing by Jack Bogle in particular. It's a consequence of what you read in chapters 18 and 19, which says that any 100% equity portfolio or 60/40 or whatever macro proportions you are going to apply to a portfolio which includes stocks and then other things. Every portfolio that is reasonably well diversified and has the same macro allocation is going to perform, he says, 94% plus the same. I think it's more like 90% plus the same. And what that means is you shouldn't sweat the allocation you've got here. You should just pick one that you're comfortable with because whatever allocation you pick is going to be within the same ballpark. All of these funds have stock market like returns. They're all highly correlated and we have no basis to say which combination is going to be the quote best unquote combination in the future. Because if we did, we would put 100% in the fund we thought was going to be the quote best unquote in the future. And then we would switch horses whenever our crystal ball told us to change.

Mostly Voices [12:58]

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

Mostly Uncle Frank [13:04]

In reality, nobody can do that with any accuracy.

Mostly Voices [13:08]

You can't handle the crystal ball.

Mostly Uncle Frank [13:11]

So the best way to handle this is to pick a allocation you're comfortable with and then stick with it through thick and thin as your account grows and keep contributing to the allocation that is doing the worst so that you maintain your allocation. You're essentially buying low and not buying high. So the allocation you have is fine if you'd like to stick with that. On the other hand, if you were planning on adding some international stocks to this allocation and rejiggering a little bit, now would be the time to do that. And the reason I say now would be the time to do that is because that international fund undoubtedly has been the worst performer of the bunch. for the past several years, probably a number of years. And so if you change into an allocation that involves that one, you would essentially be selling high and buying low. But then you'd be stuck with it because it might continue to underperform in the future. Who knows? I would not incorporate bonds into this portfolio right now, given where you are in your accumulation stage. The only exception is if you do not feel you could ride out a big drawdown with your stock funds, because that's the other thing. If the stock market crashes, you have to ride through and buy through that stock market crash. What I would be thinking about more in detail is what you want your retirement portfolio to look like. because eventually the transition you are going to make is to move from your accumulation portfolio to that retirement portfolio. And you have a lot of flexibility as to the timing and how to do that. But you do need to have a target number in mind based on your projected expenses as to how much you need to accumulate. And once you're getting close to that target number in your accumulation portfolio, that's a perfectly good time to move it so that it's all set up and going down the track when you pull the plug on your retirement. Now, it's going to be a lot easier to make those kinds of adjustments if you also have an IRA working for you because you can buy and sell anything you want in the IRA. And so that's yet another reason to have an IRA because it gives you that flexibility. You could also have a taxable brokerage account if you had enough money to fill up the 401k, the IRA, and then put the remainder in a taxable brokerage account, which would again give you more flexibility going forward. Eventually, when you quit your job, you will want to roll that 401k into an IRA, maybe the same one, depending on if they're both traditional or not, and then you can make even more adjustments there. But that's what I think I would do. And do not consider that to be investment advice, just my opinion and entertainment, if you can call it that.

Mostly Voices [16:20]

Surely you can't be serious. I am serious. And don't call me Shirley. But thank you for that email.

Mostly Uncle Frank [16:27]

And now our next email comes from Sebastian.

Mostly Voices [16:31]

Forgive me if I sound quite mad, but it's true all the same. Sebastian saw the face of God.

Mostly Uncle Frank [16:40]

And Sebastian writes：hello Frank, long time listener,

Mostly Mary [16:44]

first time emailer. I wanted to propose an idea for your critique in regards to rebalancing an accumulation strategy. So, an age-old gamble in investing is when someone constructs a portfolio holding stocks and bonds in an attempt to time the market via selling off bonds in a bear market, downturn, crash or correction in order to buy more equities at a lower price. The gamble is hoping you can achieve a premium during a downturn that is greater than the performance of holding an all equity portfolio. My thought is to hold an all equity portfolio and during a downturn to sell off a portion of the regular funds and buy leveraged funds, then swap fully back into regular funds when the prices recover to reduce the time I'm holding leveraged funds. The idea is essentially doubling down, but with the knowledge that markets have continuously recovered from lows to make new highs.

Mostly Uncle Frank [17:35]

Did somebody mention gambling here? You have a gambling problem. Uh, what? It's gone. It's all gone. What's all gone? The money in your account. It didn't do too well. It's gone. So this is one of those things that sounds great in theory. In practice, it's going to be a nightmare to implement. The first thing you would need to do, though, is set up very specific rules as to what would trigger the implementation of this. And I mean by a number. If the account falls, for instance, say 10%, then we do this. If it falls by another 10%, then we do this. Whatever rules you want to put in there, they have to be numerical and they have to be completely specific and automated so that there is no thought process that you have to go through to actually implement this strategy because it's going to be completely nerve-wracking when it's going on because it's catching a falling knife is what you're trying to do. The problem with this kind of strategy is you don't know how deep the drawdown is going to be. You don't know how long the drawdown is going to go on. And so it's very difficult to implement from that point of view. A more conservative method of implementing this that might be more actionable Would simply say if the account is down by a certain amount, then our future allocations will go into these leveraged funds until, for instance, it goes back to where it was to begin with or something like that. Don't be saucy with me Bernice. Well you have a gambling problem. That would at least protect what you already have accumulated. and minimize your risks and also be a lot easier to implement than having to sell things in a drawdown and buy even more risky things and then watching them continue to go down, which could multiply your losses, at least temporarily, and temporarily could go on for years. You can't handle the gambling problem. So if you implemented this in a period like starting in 1999 or 1967, you could go on for more than a decade before the whole thing turned around. That's not an improvement. Which might be extremely painful if you had invested a lot. On the other hand, if you were at the very beginning of your journey and you were only investing a little bit of money at a time anyway, it might not be that painful because you know that you're going to be investing a whole lot more in the future. You're not going to amount to jack squat. But in the end, you're gonna end up eating a steady diet of government cheese and living in a van down by the river. So I don't think I would be in favor of something like that unless it was completely automated and you were not allowed to touch it and only a computer was implementing it for you. The psychology of it would just be horrific.

Mostly Voices [20:55]

And I said, Sebastian, no, but he made me look. He made me see that terrible sight. Sebastian knew it all along. That what he had shown me was the horrible, the inescapable truth. You can't handle the truth. But thank you for that email.

Mostly Uncle Frank [21:18]

And now, fourth off, we have an email from David, and David writes：Thank you again

Mostly Mary [21:22]

for your wonderful podcast. Two observations as I experiment with risk parity concepts：1. The ability and difficulty of ignoring the market timing and expected return prognostications. 2. The ability to be platform agnostic, select the best ETFs from various providers. No need to comment, but based on my experience above are distinct advantages and for many perhaps difficult to adopt.

Mostly Uncle Frank [21:48]

Well, there's no need to comment, but I think it is worth commenting on these things as they plague all of us to one degree or another. I agree it is difficult to ignore market timing and expected return prognostications, especially if you are subjected to financial TV or read a lot of popular finance, essentially. The way I put this in perspective is to recognize how people get paid. That's what I'm always thinking about when I'm watching whatever somebody has something to say about a topic. How is this person actually getting paid for this? When it comes to financial media, they are getting paid by clicks and eyeballs which means they're really in the entertainment business not the information business because the information that would be useful to you is probably really boring and not very entertaining. Let me understand this, because I don't know, maybe it's me. And it doesn't change very much over long periods of time. What do you mean funny? Funny how? How am I funny? But that is not conducive to the way they make money. So financial media is more like a sports channel or a fashion channel. than it is like a how-to manual or instruction manual or academic paper, which is what you would be actually looking for for meaningful information for your portfolio constructions. Because making predictions about the future is an entertaining enterprise. Human beings have been doing that since the dawn of time. usually like things like the weather, or where the food is going to be, or any number of other things, and have come up with all kinds of ways of predicting the future over thousands and thousands of years that include looking at the stars, looking at the entrails of animals, and now we're substituting various measurements of various things as a hopeful basis for predicting futures. in financial markets. Now, the crystal ball has been used since ancient times.

Mostly Voices [24:07]

It's used for scrying, healing and meditation.

Mostly Uncle Frank [24:11]

And the trouble is there's no penalty for those people making these predictions for when they're wrong. Wrong! Because most of the time, whether they're right or not is a random event or just consistent with whatever probabilities are there the base rate probabilities of say the stock market being up in a particular year. And so it should have the same weight as say somebody trying to predict who's going to win the Super Bowl when they're making the prediction in October. It's only a few months down the road but most people are going to get that wrong most of the time. Forget about it. The other thing to know or think about with respect to the financial media Is that they are essentially in bed with the financial services industry. Am I right or am I right or am I right? It's kind of a I'll scratch your back if you scratch mine arrangement.

Mostly Voices [25:12]

As they shake hands with the devil when they scream to the burning gates of hell.

Mostly Uncle Frank [25:15]

So they never really want to be critical of each other because it reduces the possibility of getting the guest on again, for example. And so there is a certain chummyness that is inappropriate for people who are doing critical thinking.

Mostly Voices [25:34]

Would you like to see my dinky? Yeah, what? My little cat dinky.

Mostly Uncle Frank [25:38]

An active financial journalist would sound like they would be cross-examining every guess they had to point out or poke at the potential weaknesses in whatever the person is saying.

Mostly Voices [25:50]

But that's not what they do at all. That's really not what I do, Peter.

Mostly Uncle Frank [25:56]

In fact, they're there to feature the person and make them look good and then not count the score later on. They never count the score or almost never. Forget about it. So again, there's no penalty for being wrong in this arena. You're a legend in your own mind. As to your second point, the ability to be platform agnostic, I think that just goes to where we have been in the recent past, that in the past it was clear that some platforms were superior for do-it-yourself investors, namely platforms like Vanguard, which had these index funds with very low fees that other platforms did not have and were not available in ETF form. And this is just a recognition that times have evolved. Groovy, baby. We've gone from what I call the Iron Age, where we have index funds and low-cost alternatives, at least on some platforms, to now the Age of Steel, where we have ETFs involving all of these things and platforms that are no fee and offer fractional shares. So we're in the Age of Steel, and in the Age of Steel you can just do more things and do them better.

Mostly Voices [27:13]

We had the tools, we had the talent. With less effort.

Mostly Uncle Frank [27:17]

This is also where that mantra from the beginning of the podcast comes in. One of our guiding meta principles, which is a foolish consistency, is the hobgoblin of little minds. Just because something was the best choice. The best, Jerry, the best. In the past, whether it was three years ago, five years ago, or 20 years ago, does not necessarily make it the best choice for today. And you just have to look at what is being offered. It's like going from cars that use carburetors to cars that use fuel injection and now going to electric cars. There's a technological advancement. And so just because you used an earlier version that maybe was the best in its class at some point in the past, does not mean that you would not switch to something that's just better if it's available now and it wasn't available in the past. And that's really where we are. Philosophically, we have a tendency to hold up consistency as some kind of a virtue unto itself. That doing the same thing we did 10, 20 years ago, just because it's the same thing, makes it a good thing. this is not a valid virtue because it does not really go to any core value other than being some kind of automaton that just does the same thing over and over again because it doesn't know any better. And that's why we need to be willing to change in pursuit of a higher value, which in this case is having lower cost funds that give us better performance and better options. for what we're really trying to do here. And whether that's to maximize our overall returns or maximize our safe withdrawal rate, using the best tools for the job as they become available makes the most sense, regardless of whether that was what we were doing in the past. But thank you for that email. I do think it is important to reflect on why we're doing what we're doing occasionally. just so to make sure that there isn't a better option that's easily available. And it also helps us discard or discount information that is not going to be useful for our process.

Mostly Voices [29:39]

Bow to your sensei. Bow to your sensei. But moving on. Last off.

Mostly Mary [29:47]

Last off we have an email from Ed and Ed writes, Hello, Frank and Mary. First off, I appreciate the YouTube tutorials. Can you please compare two portfolios in Portfolio Visualizer with the following asset classes? One, 100% small cap value and two, 50% US stock market, 20% US small cap value, 20% long-term government bonds, and 10% gold. I pressure tested these two with 8% withdrawal rate since 1978. Both grew, but Portfolio 1 grew from $10,000 to over $500,000, and Portfolio 2 was at $21,900. So, why would one not choose 100% small cap value as the one and only portfolio to hold? I know past experience is only an indicator and not a predictor of the future, but what am I missing? Kind regards and Happy New Year, Ed T. All right, this is interesting. Real wrath of God type stuff.

Mostly Uncle Frank [30:45]

What we're really looking at here are a couple of analysis or process issues. The first one is called start date sensitivity. And if you'll notice this particular start date due to where the data is starts in 1978 and that is a particular auspicious time to start with a small cap value based portfolio. because it was going to go up for 10 years in a row starting that year. And it's a particular inauspicious time to have any gold in your portfolio because it was just about to peak. So you could switch it around, but the way to really get around that is to use Monte Carlo simulations to do these kinds of comparisons which scramble all the data available and give you a range of outcomes. when you're doing something like this. The second analysis issue here is more critical, and that is that you are not comparing apples to apples here. You are comparing a 100% stock-based portfolio to a 70% stock-based portfolio. And using the macro allocation principle that we talked about earlier, that you would expect over time, particularly long periods of time, the 100% stock portfolio is going to perform better. And you can see this if you look at the Sharpe ratios when you just put these portfolios into Portfolio Visualizer, that the diversified portfolio has a higher Sharpe and Sortino ratios, meaning that it's got a better risk reward ratio than the 100% small cap value. To normalize or do an actual comparison between these two things, there are two ways to do it. Either you can add leverage to the diversified portfolio. This is what the hedge funds do to make it perform like a 100% stock portfolio. And in this case, to do that, you would multiply everything times 1.43. in that portfolio and create a leveraged portfolio and then compare it to the 100% stock portfolio because those sort of things would have similar risk reward characteristics. The other way of doing it is to de-leverage the 100% stock portfolio and make it a 70% stock portfolio and 30% cash or some other neutral thing. And then you would also have an apples to apples kind of comparison to do. so I went ahead and ran a few things here to incorporate these ideas and do this kind of process analysis. First talking about the Monte Carlo simulations. And we did this with the Monte Carlo simulator over at Portfolio Visualizer. Now you can only put in one portfolio at a time into that thing. So you can't do the side-by-side comparison. You literally have to put one in, look at it, put another one in, look at it. But you could do that. and what you are interested in here is the failure rate or success rate, however you want to call it, over a long period of time, 30 or 40 years. I should have probably done 45 years given you want to go to 1978, but I did just a 30-year analysis because that comes up as the default for this. Anyway, and this is particularly important for Non-standard kind of withdrawal rates because the more you get outside of those kind of 4% boundaries where just about everything is going to work, the more risk you you would be taking. So if you put the 100% small cap value into this Monte Carlo simulator, you get a 70% success rate or a 30% failure rate. over a 30-year time period taking out 8%. And now without adding any leverage to the more diversified portfolio, your portfolio number two, that one succeeds 66% of the time in the same kind of simulation. Unfortunately, there's no way to add leverage to it in that tool. I'll show you how to do that elsewhere in a minute. But you can see that's pretty close even without the leverage. So how can you make a portfolio comparison in this tool? What you do is you de-leverage the small cap value one to make it a 70/30 portfolio, 70% small cap value and 30% cash or short-term treasuries or something like that. Now that portfolio only succeeds 54% of the time under a withdrawal rate of 8%. in that simulator. So making the apples to apples comparison using the Monte Carlo simulator, you see that the more diversified portfolio is actually significantly better for a drawdown than the concentrated portfolio, which is not surprising and that's what you would expect. Okay, so let's look at some other comparisons and for these we're going over two portfolio charts. We have the tools, we have the talent. Now, Portfolio Charts is nice for a couple of reasons for this kind of comparison. First of all, it's got all of the metrics coming out popping out at you in one big chart. You go to My Portfolio in there, put in your portfolio, and then it generates all these things and you just go down and look at all of them and can tweak them for various things. The other thing is it allows you to put leverage right into the portfolio so you can create a portfolio right there and then that has over 100% in it. So we can do this leverage portfolio comparison. Unfortunately, the way this is set up, I can't link to this directly. I can link to the page, but you're going to have to put in these numbers to make this work so you can see what it's like in comparing the portfolios and you have to do them one at a time. So the first thing I did is I took the 100% small cap value I put that portfolio into portfolio charts. Looking at the basic statistics that pop out for something like this over simulated performance going back to 1970, you see that there is a 49% drawdown that lasts up to six years. When you look at the projected safe withdrawal rate for over 30 years, it comes out to be 6.7%. The projected permanent withdrawal rate comes out to be 6.3%. And then if you go down further, you can simulate retirement withdrawals and you can put in 8% into that portfolio for your 8%. Make sure you also change the guardrails boxes and what you want are 0% in both of the first two boxes regarding changes in withdrawals. So you are withdrawing at a constant 8% adjusted for inflation. And then the other four boxes there on the right side should be blank. And so when you run that, you can see a variety of outcomes that are simulated. But anyway, it fails six times over that period if you're just looking for a failure rate. And I'm not sure how many simulations there are there. There are a lot of them. There are a lot of lines going on. So how do we then take the diversified portfolio, your portfolio number two, lever that up and do a comparison? Well, we want to have a portfolio that has the same risk characteristics as to how much stock is in it. And so the portfolio you had had 70% in stocks. To lever that up, you multiply it times 1.43. which gets you very close to 100. So this is levered up to 1.43. That ends up being, if you want to put these in the boxes, 71% in the TSM box, that's total stock market, 29% in the small cap value box, SCV, 29% also in the long-term treasury box there, and then 14% in gold. GLD, and you'll see that adds up to 143. And when you do that, you get these statistics, which you can compare back to the old ones, which I'll try to do here orally. And so it has a 36% drawdown that last five years that compared to a 49% drawdown lasting six years for the 100% small cap value portfolio. It has a higher safe withdrawal rate of 7.5% versus 6.7% for the other one. It has a higher permanent withdrawal rate of 7.2% versus 6.3% for the other one. And then when you apply the 8% withdrawal rule like we talked about, this one fails only twice compared to the 100% small cap value portfolio that failed six times. And then I thought, well why don't we take one of our sample risk parity style portfolios and lever that up in this calculator and see what that looks like. And so I did a version of that using the Golden Ratio Portfolio. And so what that ends up looking like in a levered form that matches a 100% stock market exposure is you have 40% in large cap growth, 40% in small cap value, 20% in REITs, and then you have another 40% in long-term treasuries and 30% in gold. I didn't bother to add the cash component, which would have been 10% in T-bills, because you're taking leverage in this thing anyway. So anyway, this ends up being levered up 1.7 to 1 to get it to a apples to apples comparison with the 100% stock portfolio. And so what do you see when you run this one? This one only has a 23% drawdown, the last about four years, that compared to the 36% for the other diversified portfolio and 49% for the 100% small cap value portfolio. It has a safe withdrawal rate, this levered golden ratio of 10% or it's really off the charts. The chart only goes up to 10%. and that compared to 7.5% for the other diversified portfolio and 6.7% for the 100% small cap value permanent withdrawal rate of 9.8% compared to 7.2% and 6.3% for the other two portfolios and then when you run it with an 8% withdrawal rate using the same parameters as we used before you get zero failures instead of two failures for the diversified one or six failures for the small cap value one. And this is consistent with the theory behind these kinds of portfolios, the papers that the hedge fund operators have written over the past 25 years, and their outcomes, at least for the ones that did it the right way with actually diverse asset classes that were sufficiently likely to generate decent returns. and that's what made Bridgewater the most successful hedge fund that you could actually invest in in the world. And so that is a good illustration of the Holy Grail principle that we talked about. But I think what your comparison actually does illustrate is that having small cap value as an ingredient in your portfolio is a good idea. and that you should have a significant amount of it because as Fama and French discovered also back in the 1990s, over long periods of time, it does tend to outperform the overall market. What you can't predict is how long it's going to underperform the market like it has done over the past 15 years or so. But thank you for that email. I do like fiddling around with these calculators and it does remind me that I need to do a tutorial about the Monte Carlo Simulator at Portfolio Visualizer, which hopefully I will get to in the next week or so. But now I see our signal is beginning to fade. There may not be a podcast from me this weekend. Got a little road trip to do. Take a child back to school. But I will try to make sure that the website gets updated. 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 put in your message into the contact form there 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 this podcast some stars in a review. That would be great. Mmmkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio, signing off.

Mostly Voices [44:23]

I'll be honest, fellas, it was sounding great, but I could have used a little more cowbell.

Mostly Mary [44:28]

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