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 foundational episodes for this program. And those are episodes 1, 3, 5, 7, and 9. and nine. One of our listeners, Karen, has also reviewed the entire catalog and has additional recommendations as foundational episodes. Ain't nothing wrong with that. And Karen's recommendations are episodes 12, 14, 16, 19, 21, 56, and 82, in addition to the first five that I mentioned. Now, I realize women named Karen get a bad rap these days, but I assure you that all of our listeners are intelligent, thoughtful, and savvy. Yes! And don't forget that the host of this program is named after a hot dog.

Mostly Voices [1:39]

That's not an improvement. Lighten up, Francis.

Mostly Uncle Frank [1:46]

But now onward to episode 157 of Risk Parity Radio. Today on Risk Parity Radio we're going to get back to our emails. But before we get to that, one of the things you receive when you start a podcast is reports from various charting services about where your podcast is being listened to. And I got an email from one of those services this week indicating that some of my listeners are in Ukraine and we made their charts this past week. so I just wanted to say I'm very sorry for your situation right now, and I wish you safety today and victory tomorrow. In honor of your president and his career as a comedian, I offer you this classic clip. Hopefully take your mind off things for a couple of seconds.

Mostly Voices [2:39]

I think it's time to put the hurt on the Ukraine. I come from Ukraine. You not say Ukraine weak. Yeah, well, we're playing a game here, pal. Ukraine is game to.

Mostly Uncle Frank [2:52]

For you, but would I take a little borax? And there'll be a couple more poignant clips at the end of this episode. Separately, I had another listener ask me if I knew of any good charities to contribute to to help out with what's going on there. And as always, when I get these kinds of questions, I consulted my oracle. Mary, Mary, why you buggin'? And Mary recommends World Central Kitchen. World Central Kitchen is an organization founded by Chef Jose Andres to provide meals in disaster situations. They have a good reputation for being organized, efficient, and actually providing good food. They are a 501c3 organization and have a four-star rating at Charity Navigator. World Central Kitchen is up and running in Ukraine and at eight border crossings. I will provide a link in the show notes to World Central Kitchen, so you can check that out if you're interested. But now back to our more mundane offerings here. Here I go once again with the email. First off, we have an email from Darren. And Darren writes, Uncle Frank, thank you for the helpful response

Mostly Mary [4:05]

to my previous email, which you addressed in episode 105. Regarding Vanguard, one of your other listeners kindly pointed out that you can use a different account type to invest in a wider range of non-Vanguard funds, but just to inform the other UK listeners, I have checked with Vanguard and this isn't possible in the UK. This is unfortunate as I have found long-term UK government bonds, gilts, to be a bad substitute for long-duration US Treasury bonds where the largest part of my portfolio is a World Equity Index Fund which is heavily weighted towards North America. That said, I realize correlations may not be consistent over shorter time frames. Thank you very much for pointing me at the Unicorn Bay Asset Correlation Tool for international funds. Maybe I missed something, but I didn't have much luck in listing any negative correlations even with long duration treasury bonds versus equity funds. In any case, it appears the tool isn't currently available to try again. On the subject of tools, Are you aware of any good sites that allow you to chart the performance of different funds overlaid? I've been surprised that searching for such a site is also challenging. One of my pension providers has this functionality, but only for the funds they offer. I'm sure there must be similar sites that cover a wider range of funds. My main question today is how someone might use a risk parity portfolio to bridge the gap between retiring from work and the point at which private pension funds can be accessed. Or, would cash savings be preferable? A better way to put this might be at what time duration for this gap would cash savings become the statistically better choice? Personally, I'd currently be looking at a 5 to 10 year gap to cover expenses. Needless to say, ideally there would be a small probability of these funds going to zero before any pensions kick in. For simplicity, let's assume that taxes are irrelevant. How would you approach this question? Is it possible to evaluate any parts of this question from any of the charts at portfoliocharts.com, for example, with the Golden Butterfly portfolio? Again, keep up the great work sharing your knowledge and experience. Thanks, Darren.

Mostly Uncle Frank [6:21]

Well, thanks for your second email, Darren. I'm glad you're enjoying the podcast and the Unicorn Bay asset correlation tool for international funds. Regarding your question on overlaying the performance of different funds, you could use MarketWatch for that, believe it or not, www.marketwatch.com, go to the upper right corner where they have the search function, and then you can search individual funds by country. So for example, for the United Kingdom, the FTSE All World is UK：VWRL. The FTSE North America is UK：VNRt. And you can do that for any country and then go to the charts section after you bring that up and you can put in more than one fund and overlay them and compare them that way. It does have some limitations, one of them being it doesn't really account for distributions very well in my experience. But in terms of just getting a good idea of a comparison between two funds, that is probably the best I can do at the moment, at least for these international funds. You can do US and Canadian over at Portfolio Visualizer, which I would recommend. All right, your second question is a bit more complicated as to using a portfolio to bridge until you get some pension funds. You can actually model this with the Monte Carlo simulator at Portfolio Visualizer. If you go to that and then click on the financial goals link, it allows you to model what they call multi-stage retirement scenarios where you have cash flows starting or stopping on certain dates. So that is where I would probably go for that modeling exercise. You put in your portfolio by asset classes, then model with the contributions or other distributions that are coming in. and you can do a Monte Carlo simulation on that combo multi-stage scenario. Now, if you were just taking something like a golden butterfly portfolio and you wanted it to last, say, 10 years, but you didn't necessarily care how much you ended up with, that it was literally a bridge account, the way I would draw down from that would be to just draw down out of the 80% that are in the risk assets. meaning everything that is not the short-term bond fund. And so you would draw down off of those until you got down to the short-term bond fund, which would be the last couple of years there, and then you would draw down from that. But that's assuming that you're literally spending that whole piece. So it's more of a theoretical exercise than something you'd probably want to do. I think you're probably better off using that tool over at Portfolio Visualizer. But thank you for that email. Second off. Second off, we have an email from Jeffrey, and Jeffrey writes.

Mostly Mary [9:20]

Frank, you know how experts will say, don't invest in the stock market unless you have at least a three to five year time horizon. What would you put as the minimum holding period for a risk parity portfolio? For example, if I had an expense I was saving for in two years time, would you consider that long enough to put my savings into a risk parity portfolio to get a better return than a basic savings account? or at least not lose it to inflation? What about an expense in three years time? Thanks, Jeffrey.

Mostly Uncle Frank [9:52]

Well, it's difficult to answer this question because part of it is determined on whether you are actively contributing to this fund over this time period, or you're just talking about literally plopping some money in today that you're going to use in some period in the future. But if you look at the historical length of drawdowns for portfolios like the Golden Butterfly or Golden Ratio. The historical max length of drawdown is three to four years. So I would say that is probably the minimum time frame that you would want to have for this kind of portfolio or to use this kind of portfolio. That being said, you might want to dial it back once you get closer and you know you're actually going to use the money. Because the other issue is do you have a hard stop date or not? when you're going to use this money. If you have a hard stop date than when you get to be a couple years from that and assuming your portfolio is higher than it was before, you may want to just pull it out and leave it in cash until you're actually going to spend it. On the other hand, if you have a variable use date, then maybe you can let it ride for a while. Do I feel lucky? At least until you plan to use it or know when you plan to use it. For sure. You have a gambling problem. And then the other option always is to just take more of the money that you have here and put it in the least volatile asset class. So if you, for instance, took that golden butterfly portfolio and instead of having 20% in short-term bonds, you over-weighted it to 30, 40, or 50%, you're just going to get a more conservative portfolio overall. Groovy baby. Your mileage may vary. Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys? But thank you for that email. Last off. Last off, we have an email from Ron, who wrote us a small novella for Mary to read to us.

Mostly Mary [11:51]

Geez. And Ron writes, hi Frank, I'm helping my mother-in-law with something that might be an issue for many of us with aging parents. She's retired and has all of her assets in qualified and non-qualified variable annuities, as that's what she was told to do years ago. From what I can tell, she pays anywhere from 1.5% to 3.5% in fees, fund expenses, and her compound annual growth rate over the past 10 to 15 years across her accounts is only 4.1%. It seems like a lot of the older generation have a lot of annuities, But they are so complicated and the fees are very hard to isolate. So here are my questions in two parts. First off, I'd like to confirm the strategy of moving out of annuities into regular brokerage slash IRA accounts. This seems like a no-brainer, but wanted your opinion. For background, she has income from SSI, a pension-like payment plan from her old employer, and rental income. all of which more than cover her monthly expenses. So she really doesn't need the annuities for her day-to-day expenses. Her tax brackets are 24% income and 15% cap gains. All of her annuities are variable, so they already have risk and are invested in equity and bond funds, mostly like 60/40 to 70/30 splits, with many having guaranteed death benefit income rides, which I believe come with more hidden costs. For the qualified annuities, there is seemingly no tax trigger when transferring a qualified annuity into a traditional IRA. Also, the tax treatment on withdrawals is the exact same in a qualified annuity as a traditional IRA. Withdrawals are taxed at ordinary income. So I see no benefit of having the qualified annuity versus a traditional IRA. An IRA at a regular brokerage will have no fees and countless more investment options with much lower expense ratios. For example, one of the of the S&P 500 index funds available in the annuity has an expense ratio of 0.49% for an index fund. For the non-qualified, although the annuity grows tax-free, it does not benefit from capital gains tax rates or qualified dividends. Plus, there is no step-up basis benefit for the beneficiary in an annuity, but there is a step-up basis benefit for assets in a regular brokerage. Assuming we can move the money out of the annuities in annual increments to not move up too much to the next tax bracket to 32% It seems like also a good idea to move these to a regular brokerage, although less of a no-brainer and more complicated of a move. What do you think? What am I missing here as this seems like a very easy decision. Second, what's the right portfolio mix for a taxable versus traditional IRA account? For example, things like gold do not produce income and are taxed at 28%. Commodities/reits also produce ordinary income as opposed to qualified dividends that come from preferred shares. Generally, I think something between the all seasons and golden ratios seem best suited as given her risk profile. So here's my proposed structure for each account and I'd love your feedback. Taxable portfolio started with the all seasons then modified it to more like a 4060, no plannum withdrawals other than the occasional purchases like a new car, home improvements, etc. 30% VUG has a lower yield percentage than VOO or VTI, so less dividends. 10% VIoV. You're going to want that cowbell. 10% PFF income is mainly qualified dividends at 15%. 30% TLT, no state or local taxes. 10% VGIT, no state or local taxes, and 10% VTEB, tax-free muni to add to fixed. Tax-Deferred Golden Ratio IRA withdraws taxed at 24% and will take required minimum distributions annually. 21% VUG. 21% VIoV. 26% TLT, dividends taxed at ordinary income. 6% VGIT instead of VGS. 10% VPU, replacing REITs based on thoughts from Optimized Portfolio. 16% GLDM does not produce income and gains text at 28%. When looking at the total combined, based on episode 132 to look at the whole thing, it looks something like this. Here is the back test on three options. They are pretty similar and all have a better Sharpe ratio than the Vanguard Balanced. But do you think you can improve on my methods a bit too? Wink, wink. Dragor strikes again. 24% VUG, 17% VIIV, 4% PFF, 27% TLT, 7% VGIT, 4% VTEB, 7% VPU, 10% GLDM. I look forward to your thoughts and feedback on all of this. And, as always, thanks for all you do. Thanks, Ron.

Mostly Uncle Frank [17:11]

Well, let's talk about these annuities first, Ron. Fat, drunk, and stupid is no way to go through life, son. Yes, I think your mother's experience with this is very typical, unfortunately.

Mostly Voices [17:25]

40 years of darkness, earthquakes, volcanoes, the dead rising from the grave.

Mostly Uncle Frank [17:29]

That a large portion of the population has been ripped off for decades on these things.

Mostly Voices [17:34]

Because only one thing counts in this life. Get them to sign on the line which is dotted.

Mostly Uncle Frank [17:42]

Come for the high commission, stay for the lousy performance. Am I right or am I right or am I right?

Mostly Voices [17:46]

All to support a bunch of milkshake drinkers. I drink your milkshake. I drink it up.

Mostly Uncle Frank [17:59]

A lot of these have been sold over the years based on fear-based crystal balls about future legislation and future higher taxes and Future God knows what. You can actually feel the energy from your ball by just putting your hands in and out. All of which was pumped into these people a couple decades ago and turned out to be wrong and false, of course. They're sitting out there waiting to give you their money or you're gonna take it. And so as you've observed, you end up being worse off both from a tax perspective and from a return perspective. Because when you take the money out of these things, you're going to be paying ordinary income tax on it in your mother-in-law's case 24% as opposed to 15% cap gains that you would be paying if you just invested it in an ordinary brokerage account. That's not an improvement. So getting to the specifics, you say first I'd like to confirm the strategy of moving out of annuities into regular brokerage slash Ira accounts. And here is your confirmation.

Mostly Voices [19:05]

You are correct, sir. Yes. I agree with you.

Mostly Uncle Frank [19:10]

It's a no-brainer yes. It's a no-brainer because you avoid the excess cost, you avoid the complications, you get the step up in basis, it's more tax efficient, and of course you get much better returns very easily. Yeah, baby. Yeah. not having to use these ridiculous funds charging ridiculous charges for basic index funds.

Mostly Voices [19:33]

You are talking about the nonsensical ravings of a lunatic mind. So I would go ahead and do that.

Mostly Uncle Frank [19:41]

Just make sure that you are following the rules for those contracts so you minimize any taxes that may have to be paid as that occurs. Your plan to move the taxable out in Small increments, annual increments seems like a good plan to me. Now going to your ideas for the portfolios that you are constructing, I think they look pretty good and it's difficult to improve on your methods here.

Mostly Voices [20:07]

I think I've improved on your methods a bit too.

Mostly Uncle Frank [20:11]

And I'm very happy you've been able to take the information provided here and apply it to this situation in the way that makes the most sense. for you and your mother-in-law.

Mostly Voices [20:22]

We have the tools, we have the talent.

Mostly Uncle Frank [20:26]

I think the only suggestion I would have is in the tax deferred golden ratio IRA, I would probably move some or all of the 6% in the intermediate treasury bonds just into gold itself. And the reason I would do that is because then you have more gold in the portfolio overall gets you closer to that kind of 15% holding that seems to be ideal over time for these kinds of portfolios. And you can probably sense from the chaos in the world we are experiencing why having a little more gold might be advisable. I love gold! Other than that, it's hard to argue with what you've done. I think it'll provide a nice smooth ride for these portfolios. Whether your mother-in-law decides to be taking money out of them or leaving it alone. Either way, she'll have a lot of good options there. The best Jerry, the best. And thank you for that email. But now I see our signal is beginning to fade. We will be picking up this weekend again. With our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio. com and I may have a rant episode coming. We'll see if I can get to that this week as well. 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 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, like, subscribe, give me some stars or review. That would be great. Okay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Voices [22:31]

You can't blow out a candle, but you can't blow out a fire. Once the flame begins to catch, the wind will blow it higher. We will fight till the end at sea in the air. We will continue fighting for our land, whatever the cost. We will fight in the forests, in the fields, on the shores, in the streets.

Mostly Mary [23:28]

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.