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 foundational episodes for this program. And those are episodes 1-3-5-7-9-11-13-15-17-19-21-23-25-27-29-31-33-35-37-39-41-43-45-47-49-51-53-55-57-59-61-63-65-67-69-71-73-75-77-79-81-83-85-87-89-91-93-95-97-99-101-103-105-107-109-111-113-115-117-119-121-123-125-127-129-131-133-135-137-139-141-143-145-147-149-151-153-155-157-159-161-163-165-167-169-171-173-175-177-179-181-183-185 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. That's not an improvement.

Mostly Voices [1:42]

Lighten up, Francis.

Mostly Uncle Frank [1:45]

But now onward to episode 161, of Risk Parity Radio. Today on Risk Parity Radio we have a special announcement. And our announcement is a brand new Risk Parity website. Yes! Welcome to Risk Parity Chronicles, which is already up at www.riskparitychronicles.com, and we'll put this in the show notes. Risk Parity Chronicles is a blog created by one of our listeners, Justin. That is the straight stuff, O Funk Master. And it contains all those things that you wanted me to do, but that I'm too lazy to do because I'm retired. Forget about it. So Risk Parity Chronicles has a blog and it also has resources including lots of the articles from the past 20 or 25 years about risk parity and its development as a methodology for investing. If you are new to this methodology, you can go over there and click on get started and it'll fill you in on the basics. And if you're an old hand, there's another section called Dive Deeper, which has some of the best articles about risk parity over the past 20 years or so. Now, who is Justin? I will read to you from the About Me section of the website. And Justin writes, hi, I'm Justin. I'm in my late 40s, married with two wonderful kids, and a funny rescue dog named Lego. Originally from California, I now live in Japan. where I have now lived for almost two decades. In my day job, I am a middle school teacher of 8th grade humanities and a personal finance course. Plus, I have a side gig teaching investing at the high school level. I write this blog from the perspective of someone who is knowledgeable about investing and enough so to know there is much more to learn. While I'm definitely no professional, I do hope that what I am experienced with, learning and teaching others, will come through And that I can explain and convey sophisticated topics in an accessible way. Groovy, baby. For years, my colleagues at school have heard about my class teaching investments and followed with, I wish I had that class now. So this is in a way my attempt to help educate all on this one aspect of investing.

Mostly Voices [4:23]

No one can stop me.

Mostly Uncle Frank [4:26]

Well, thank you, Justin, for joining in and joining in in the spirit of the business model that we are working under here.

Mostly Voices [4:34]

I got this inkling, I got this idea for a business model. I just want to run it past you. Here's how it would work. You get a bunch of people around the world who are doing highly skilled work, but they're willing to do it for free and volunteer their time, 20, sometimes 30 hours a week. Oh, but I'm not done. And then what they create, they give it away rather than sell it. It's gonna be huge. A really big one here.

Mostly Uncle Frank [5:04]

And I have to say, your website looks a lot more attractive and accessible than mine does.

Mostly Mary [5:08]

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

Mostly Uncle Frank [5:12]

And I'm hoping that we can work together in a collaborative way that will be useful to both my listeners and your readers.

Mostly Voices [5:20]

Yeah, baby, yeah!

Mostly Uncle Frank [5:24]

I will be happy to give you frequent shout outs as you build out your content.

Mostly Voices [5:27]

Bow to your sensei. Bow to your sensei.

Mostly Uncle Frank [5:31]

But now back to our regularly scheduled programming here. Here I go once again with the email.

Mostly Voices [5:39]

And first off we

Mostly Uncle Frank [5:43]

have an email from my contact info and my contact

Mostly Mary [5:47]

info writes Frank, I thought the comments from Fama in this recent article tie in well with the concepts you often discuss.

Mostly Uncle Frank [5:58]

Well, I was unable to access that article in the New York Times because it's behind a paywall, but I did find a little summary of it on another website, which I will link to in the show notes. And in the article, they are interviewing Professor Eugene Fama about what he thinks the effect of the war in Ukraine will have on markets. And his principal answer to most of the questions was, I don't know. And they note he spent six decades studying stock market prices, yet he is happy to admit that he doesn't know what's going to happen in the future. Everything is proceeding as I have foreseen. Other comments he makes. He says it's Putin who's irrational. Everything that has transpired has done so according to my design. He says markets may be struggling to price securities due to uncertainties, but that does not mean the markets are irrational. The problem with pricing is a question of how much is knowable right now. How's this Russian thing going to work out? Who knows?

Mostly Voices [7:12]

Crystal Ball can help you. It can guide you.

Mostly Uncle Frank [7:16]

Asked about whether he reads the analyses of Wall Street fund houses, he says, I don't read any of that. It's investment porn.

Mostly Voices [7:28]

A really big one here, which is huge.

Mostly Uncle Frank [7:32]

Asked about risk in equity markets, he says, There is always risk in the stock markets. Always. It never goes away. People have to remember that.

Mostly Voices [7:41]

You can't handle the dogs and cats living together.

Mostly Uncle Frank [7:44]

Asked whether the Fed can bring inflation down without causing a recession, he says, I have no idea. Unfortunately, Milton Friedman, if he were alive today, wouldn't know either. He'd be shocked, really. He'd have to rethink everything. Asked how the Ukraine crisis will play out, he said, I've learned not to make predictions Can't do it. Who knows? Forget about it. Well, that is quite consistent about what we think about the future here. Somebody says, why is that? We don't know.

Mostly Voices [8:21]

What do we know? You don't know. I don't know. Nobody knows.

Mostly Uncle Frank [8:25]

And it was gratifying to see he did not try to bring out a crystal ball wearing a cape or otherwise.

Mostly Voices [8:33]

You can't handle the crystal ball.

Mostly Uncle Frank [8:38]

I found that very entertaining and thank you for that email.

Mostly Voices [8:43]

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

Mostly Uncle Frank [8:47]

Second off. Second off, we have an email from Spencer. And Spencer writes.

Mostly Mary [8:54]

Good afternoon, Frank. In episode 156, you stated that there are unfortunately no leveraged small cap value ETFs. I was under the impression that the ETF SAA was a two-times leveraged small-cap ETF. Am I off base on this? I've been utilizing it in an experimental leverage portfolio. It does appear to track with VIoV pretty nicely, although not as precise as UPRO tracks the S&P 500. I know you're a Seinfeld fan. Have you watched Curb youb Enthusiasm? Larry David could make for some nice drops. Anyway, great work as always, and thanks for giving us fellow lawyers a good name.

Mostly Voices [9:35]

I mean, it was terrible. This is just one of the worst things I've ever had in my life. I swear to God.

Mostly Uncle Frank [9:42]

Well, you're only slightly off base on this one, Spencer. SAA is indeed a leveraged small cap ETF, but it's not a leveraged small cap value ETF. So it's similar to TNA, which is also another small cap leveraged ETF, but TNA has more leverage in it. That being said, I don't have any qualms or comments about you using it in particular. It may be a very useful tool in your particular situation. Believe it or not, I don't watch too much TV these days, but I have seen a little bit of Curb your enthusiasm and I would say it's splendid. You all say splendid all the time. They say splendid.

Mostly Voices [10:30]

Who doesn't say splendid in their life at least twice a day? I never say splendid. Never in my life. Nobody else says splendid. People say splendid at least twice a day. It is fact. And now I'm just wondering whether you work for the law firm of Igor Gregor and Bolivar. Let me ask you this, Gregor. Yes. Do you know Timor? Do you know Igor? Okay, I don't know. Who are these people that I'm supposed to know? Igor from Prosper, Tim or from Kukor.

Mostly Uncle Frank [11:03]

What am I in the Colombo episode all of a sudden? And thank you for that email. Next off, we have an email from Satoshi and Satoshi writes. Hi Frank, big fan.

Mostly Mary [11:11]

Your portfolios are very interesting. However, I find the safe and perpetual withdrawal rates a little high or over optimistic. Did you back test them in the worst periods possible, such as 1921 and 1966? Thanks.

Mostly Uncle Frank [11:28]

Well, this is an interesting question and it's not as simple as it sounds. The first answer is that no, I have not done it simply because I don't have a database that goes back that far or that contains the asset classes in a manner that allows testing of these things. But you can find other people that have attempted to do this with varying results. First, I'll refer you back to episode 40 of Risk Parity Radio, where we discussed an article by Big Earn McCracken, which is part of his Safe Withdrawal Rate series, number 34, where he does an analysis of gold. in a portfolio and concludes that the safe withdrawal rate of portfolios would be improved if they have 10 to 15% of gold in it. We're talking about basic otherwise S&P 500 intermediate treasury bond portfolios. There's also a nice video on YouTube by Next Level Life, who's another person that analyzes a lot of portfolios. And he analyzed the Golden Butterfly portfolio in particular, going back to 1927. And what he came up with was using kind of a modified data set, he got a safe withdrawal rate for the Golden Butterfly of 4.04% since 1927, with the worst period beginning in 1937. Now, he caveats this with the principal problem with trying to do this. This can only be done in a theoretical way, and the reason for that is because we are in a different currency regime since 1971. Prior to 1971, gold in particular was pegged to the US dollar and therefore did not float in any meaningful way. This means you are almost treating gold as if it were cash, and not giving it the kind of impact that it would have had or has had since 1970 on portfolios. The other problem with it is a legal problem. You couldn't own it legally between 1933 and about 1974, at least not in the United States. What you might have been able to invest in is gold miners. And that would be very interesting because during the beginning of the Great Depression, Gold miners increased in value by about 500%. And so if you held a small allocation to Homestead or some of the other miners at that time, it would have had a profound difference on the performance of your portfolio because you were essentially printing money in a deflationary environment. The next time this would have come into play in particular would have been towards the end of the 1950s and into the 1960s. Towards the end of the 1950s, gold stocks and gold miners had hit a low, and then they started increasing in value throughout the 1960s. And what was going on there is very important to know about. The Bretton Woods system that was established in 1944 that pegged gold to the dollar at about $35 an ounce was beginning to fail starting in about 1960. And so what happened was the central banks at that time, eight of them, formed something that was called the London Gold Pool, where they hoarded a whole pile of gold to seek to keep the price down by selling into the market whenever the market price rose over the $35. So there was some artificial suppression going on there. And that essentially lasted until the thing fell apart in the late 1960s. and soon after that, Nixon closed the gold window and all the currencies began to float, as did the price of gold, which rocketed upward by about five fold, I believe. Now, you can imagine in an alternative universe that would not have happened all at once. There would have been this steady rise in the price of gold starting in about 1960. So I think there's an inherent problem with trying to apply an analysis of gold in portfolios prior to the 1970s, because whatever you're doing is going to be artificial, either because the gold price wasn't floating or you weren't allowed to own gold at all. And then this turns into a very academic and theoretical exercise about what might have been if certain laws or monetary regimes did not exist. But I think fundamentally, you're probably asking the wrong question here. The question should not be what were the specific safe withdrawal rates for this kind of portfolio in this kind of period? The question should be whether they're better than alternatives. And we know that they are from the work of Big Earn and Next Level Life and others. If you have a more diversified portfolio that has more than just stocks, bonds, and cash in it, you are going to have better safe withdrawal rates. And that's regardless of any bucket strategies or any other current machinations you hear people talking about, because the math is the math when it comes down to it, analyzing a portfolio as a portfolio. So if you're worried about what the safe withdrawal rates are for these kind of portfolios, you should be even more worried if you're not holding one of these kind of portfolios, because you have a much bigger problem to deal with. We got a scary 140 this week. I think one of the best comparisons is to compare the length of the drawdown of a standard 60/40 portfolio compared to one of our risk parity style portfolios. And if you have that 60/40 portfolio, you should be prepared for a drawdown that might last 13 years, whereas the longest ones we've seen over the past 50 years for the risk parity style portfolios have only been three or four. And no, having five years worth of cash lying around in a bucket is not going to solve that problem. But thank you for that email. Last off. Last off, we have an email from Andre and Andre writes.

Mostly Mary [17:57]

Dear Risk Parity Radio, thank you so much for this show. It is an island of frank talk and humor in a sea of marketing and fear. Fear? That's the other guy's problem. It's also been very helpful for me to think of future income as a low-risk annuity or cash. How should I account for inheritance? I'm not imagining a trust fund level windfall, but before I retire, I can reasonably expect to inherit an estate of far more value than my current net worth, maybe even more than my eventual retirement as a whole. I know it's a fool's game calculating its future value with any precision, but it's a large semi-developed agricultural property that will certainly not go to zero. Neither am I certain if I would sell it, rent it, or live on it. All options are on the table. We're about two-thirds the way to keep the lights on LeanFi, 3% withdrawal rate and still in the accumulation phase. I don't foresee living off investments alone for a couple of decades yet, so I don't want to go too conservative too early. How should we account for the reasonably assured windfall? P.S. I love the sound effects. Keep climbing your second mountain. We are all blessed by your new vocation.

Mostly Voices [19:10]

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

Mostly Uncle Frank [19:18]

Well, Andre, this is an interesting question and reminds me of my legal career where I cross-examined a lot of experts about valuation issues. And there are many books written about how to value things depending on what they are and what the purpose is for them. So I will tell you, you would use a different valuation metric for this depending on whether you were going to sell it rent it or live on it. Because if you were going to sell it, you would just be looking at comparable property values around it. If you were going to rent it, you might model it as a series of cash flows, like you might model a business or a debt instrument and then do a discounted cash flow analysis to figure out how much it's worth at a different time, say present day. if you were going to live on it, then it might only have the value of what the cost of your alternative living arrangement would have been, if you can wrap your head around that. Because in that case, you would get what is called imputed rent. You would be paying expenses on your property, but you wouldn't be paying rent to live somewhere else. So you would think about applying all three of those valuation methods to determine the value of this property. But the main problem you have is that you don't know when you're going to get possession of it, so you don't know what that valuation date is in the future. Now the best way to do that is a little bit morbid. You whip out your Gompertz mortality curve, which is translated better into actuarial tables about when the person who currently owns it is likely to die. And you might use that as a valuation date, although it's going to change every year because the longer you live, the longer you're likely to live. But if you want to do a comprehensive analysis, that's what you do. You would identify an appropriate valuation date, then look at the three different use cases and do separate valuations for each one based on the principles that apply to that particular case. and then you would back it down into today's dollars and you could give an estimate as to what it would be worth today. Honestly, I'm not sure it's worth doing all that work. Real wrath of God type stuff.

Mostly Voices [21:44]

The simplest way to put a number on it would be this.

Mostly Uncle Frank [21:47]

You would figure, well, I'm gonna live on that instead of what I'm living on now. What are the expenses I'm going to save or what is this property I have now that I'm gonna be able to sell? and use that as a proxy for the valuation. And there is your back of the envelope methodology. But thank you for that email. It gives me fond memories of wading through expert reports valuing steel mills and gold mines and other industrial operations.

Mostly Voices [22:13]

Secondary latent personality displacement. Oh, great one. Yes, sir.

Mostly Uncle Frank [22:20]

But now I see our signal is beginning to fade. We will pick up again this weekend with our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page. 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 and put your message into the contact form there, and I'll get it that way. If you want to check out additional materials on risk parity investing, I suggest the blog Risk Parity Chronicles at www.riskparitychronicles.com, where you will find a wealth of resources. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, give me some stars, and a review. That would be great. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Mary [23:50]

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.