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 [0:18]

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 1-3-5-7-8. 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 [1:40]

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

Mostly Uncle Frank [1:44]

But now onward to episode 183 of Risk Parity Radio. Today on Risk Parity Radio we'll do what we seem to do best around here, which is work through our backlog of emails, these ones from early June.

Mostly Voices [2:03]

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

Mostly Uncle Frank [2:09]

First off, we have an email from my contact info.

Mostly Voices [2:13]

Oh, I didn't know you were doing one. Oh sure, I think I've improved on your methods a bit too.

Mostly Mary [2:21]

And my contact info writes... Great question and wonderful response on passive investing and market efficiency on episode 177. Probably worth mentioning that as Fama points out, there is no asset pricing model that definitively explains assets prices. Many pundits fail to mention this when discussing market efficiency. Jack Bogle often discussed the cost matters hypothesis rather than efficient market hypothesis.

Mostly Uncle Frank [2:56]

Although the debate between active and passive often is framed around market efficiency, which is impossible to prove or disprove, most likely the underlying force driving the debate is cost matters hypothesis. Thank you. Well, this brings up a lot of musings in my head that are near to dear in my heart since I'm so obsessed with the history of ideas.

Mostly Voices [3:11]

You see, if you go back in history and take every president, you'll find that the numerical value of each letter in the last name was equally divisible into the year in which they were elected. And by my calculations, our next president has to be named Yelnik-McWawa.

Mostly Uncle Frank [3:30]

You note that Fama points out that there is no asset pricing model that definitively explains asset prices. This is actually one of the fundamental problems economics has had throughout its entire history. If you go back to pre-economic days, around the 16th century, 16th and 17th century, it was thought that the wealth of a nation was measured in how much gold it had. I love gold. Then after that along came a group of thinkers known as the Physiocrats were mostly French.

Mostly Voices [4:12]

How the money? The mo Mo said mo morning morning morning money morning And their theory was that wealth was tied up in land and land production.

Mostly Uncle Frank [4:29]

Don't be saucy with me, Berneise And then you get to the classical economics of Smith and Ricardo and Marx. You want to be a public nuisance? Sure, how much does the job pay? I've got a good mind to join a club and beat you over the head with it. And what they thought then and what was the cardinal assumption of classical economics was something called the labor theory of value, that the value of something could be calculated based on how much labor was put into it in addition to the raw materials that were used. And that was how the price of anything could be determined. Now, that assumption wasn't very good either. And so we have in neoclassical economics the assumption that the price of something is simply determined by its demand, which is in turn determined by the collective wisdom of a group of rational actors that are fully informed of all information relevant to determining the price or demand of the object. Which is rarely true in life, or at least not for very long. Unstable equilibria is what we end up with, but is the basis of the efficient market hypothesis. I think the only true statement you can make about that today is sometimes markets are efficient and sometimes they are not. Because sometimes the underlying assumptions are true, and more often than not, they are not.

Mostly Voices [5:57]

That is the straight stuff, O'Funkmaster!

Mostly Uncle Frank [6:01]

But that is also a product of having a dynamic system with multiple actors going in and out and changing information. But that's probably enough of that frolicking detour of thought. Well, I could go on for hours, but I'd probably start to bore you.

Mostly Voices [6:15]

When they built those roads, they had no thought of drainage in mind. So we had to take a special Jeep up to the main road. In fact, we were lucky to even get a Jeep since just the day before only one that we had broke down and had a bad accident.

Mostly Uncle Frank [6:31]

The cost matters hypothesis is of course more relevant to do-it-yourself investors such as ourselves. And just so everybody knows what we're talking about, If you read Common Sense Investing by Jack Bogle, he spends a lot of time just talking about how expensive these quote helpers unquote, also known as the financial services industry, actually are.

Mostly Voices [7:00]

Am I right or am I right or am I right? Right, right, right.

Mostly Uncle Frank [7:04]

And the main point he raises there is that first they're unlikely to beat the market, so you're better off with low cost funds for that reason. But even if they are likely to beat the market, their costs of their services are more than what they are delivering.

Mostly Voices [7:23]

Am I right or am I right? Am I right?

Mostly Uncle Frank [7:27]

So for example, if you are relying on a safe withdrawal rate for a portfolio, but you are also paying an AUM fee you need to subtract that from your safe withdrawal rate. And it's going to be relatively a huge number.

Mostly Voices [7:42]

A really big one here, which is huge.

Mostly Uncle Frank [7:47]

For an AUM fee of 1% and you're taking 4% for your safe withdrawal rate, that is 25% of your retirement income. Which is a lot. Inconceivable! Now since common sense investing was written and we went through this low-cost index fund revolution that we call the Iron Age around here, there's been a lot of literature created by the financial services industry in attempts to justify their fees. Always be closing! But if you read that literature, you'll find that it all comes down to The justification being primarily preventing do-it-yourself investors from doing dumb things with their money, such as jumping in and out of funds or pulling out money in downturns. Are you stupid or something? Stupid is as stupid does, sir. Serious writers and academics no longer claim that managed funds or accounts are likely to do better than simple indexed accounts. because they tend to underperform on average. But there will always be marketing of people with magic systems or ideas who claim they can beat markets on a consistent basis. A crystal ball can help you. It can guide you. My own feeling is, is that if they can, they are unlikely to be offering their services to the general public, as it would not make much sense. They are much better operating with their own funds or a limited set of investors. So ultimately, I agree with you that it is this cost matters hypothesis, best expressed by Jack Bogle, that really makes do-it-yourself investing superior to managed solutions, so long as you can follow a few rules and avoid panicking and other bad behaviors.

Mostly Voices [9:47]

Fat, drunk, and stupid is no way to go through life, sir.

Mostly Uncle Frank [9:50]

So what can I say?

Mostly Voices [9:54]

You are correct, sir, yes! And thank you for that email. Second off, we have an email from Jeff. And Jeff writes.

Mostly Uncle Frank [10:09]

Hi, Frank.

Mostly Mary [10:13]

I am curious if you would count I-bonds as either cash or bonds for asset allocation purposes. I am creating a system of buckets in a spreadsheet to see how I am doing towards hitting my goals for each asset such as gold, small cap value, etc. But I am curious if you think the I-bonds should count as cash as opposed to bonds in a traditional risk parity account. I would think it would be considered closer to cash as it can't lose value and has a set payment every six months. Yes. The other bonds in my portfolio are intermediate and long-term treasuries. Thanks as always for your advice. It is truly appreciated and I have recommended your podcast to many people as well as giving you five stars on the podcast app, Jeff.

Mostly Uncle Frank [11:00]

Well, Jeff, first, thank you for your kind words and your five stars. The best, Jerry, the best. But getting to your question, I certainly agree with you that I bonds should be categorized along with other short-term bonds, cash, savings accounts, other things like that.

Mostly Voices [11:24]

Yeah, baby, yeah!

Mostly Uncle Frank [11:28]

When you look at I bonds, you see that they effectively have a one-year required duration, and then after that they have a variable interest rate and are completely liquid. And so like those other kinds of investments I mentioned, they are really there in your portfolio for their stability and their liquidity and are generally characterized by having very low volatility, but typically also low returns. I Bonds get to be an exception to that when we have high rates of inflation like we do right now, but historically they have had very low returns. Now I think the best way for us as do-it-yourself investors and retirees to use I bonds is to build essentially an I bond ladder, where you put the maximum you can into I bonds every year, but then you have a steady stream of them that are always going to be available and can be drawn upon as needed. So for example, if you were using something like the Golden Butterfly portfolio, the I bonds would take the place of some of the allocation to the short-term bond fund, SHY. And if you were using something like the Golden Ratio sample portfolio, the I Bonds would take up some of the cash allocation. To me all of this is a kind of a no-brainer, but it does kind of beg the question in my mind as to why more financial advisors have not recommended this course of action in the past and are trying to stick people in Megas or other Short-term annuities and things that have less desirable characteristics than I bonds.

Mostly Voices [13:06]

Get them to sign on the line which is dotted.

Mostly Uncle Frank [13:10]

And I can only gather from it that there is no incentive for any paid financial advisor to ever recommend somebody go into I bonds because they won't make any money off of it. Third prize is you're fired. I did learn about one of the new tricks of the financial services trade that is going around these days. which is to include as part of the AUM fee all monies that are not only being managed as investments but separate those monies that are being allocated to annuities and other products. That's not an improvement. And that's supposed to get around the incentive problem that these advisors allegedly have for not wanting to recommend those products. It's a trap! To me it just sounds like another straw to drink your milkshake.

Mostly Voices [14:02]

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. I drink your milkshake. I drink it up. And thank you for that email.

Mostly Uncle Frank [14:39]

Next off, we have an email from Leah.

Mostly Mary [14:47]

And Leah writes, Is the foolish consistency statement on your podcast intro from Warren Buffett It sounds like him, but I'm not sure. What's the story behind it?

Mostly Uncle Frank [14:56]

Now that is a question. A question?

Mostly Voices [15:02]

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

Mostly Uncle Frank [15:14]

Thank you for asking it and allowing me to pontificate.

Mostly Voices [15:19]

It was at that moment that I first realized Elaine had doubts about our relationship. And that, as much as anything else, led to my drinking problem.

Mostly Uncle Frank [15:26]

That is not actually Warren Buffett, but Ralph Waldo Emerson, who wrote an essay called Self-Reliance back in 1841.

Mostly Voices [15:36]

Yes, the old one. Yes, it is still in my memory banks.

Mostly Uncle Frank [15:43]

Now that essay and the core of his other work and what people like Thoreau were writing at the time are the source material for much of what we view as Americanism or individualism today and is also the core or source material for the entire self-help genre.

Mostly Voices [16:04]

Surely you can't be serious. I am serious. And don't call me Shirley.

Mostly Uncle Frank [16:12]

So a lot of times when you're asking yourself, well, this looks like a good idea. Where does it come from? If you go back, you'll find it goes back to Emerson and often to this very essay. Now, I will link to it in the show notes as well as an oral version of it you can listen to on YouTube. But let me just read you a couple of more things from it because some of it may sound familiar. First, the rest of that quote that we start the podcast with：A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. With consistency a great soul has simply nothing to do. He may as well concern himself with his shadow on the wall. Speak what you think now in hard words, and to-morrow speak what to-morrow thinks in hard words again, though it contradict everything you say today. Ah, so you shall be sure to be misunderstood. Is it so bad then to be misunderstood? Pythagoras was misunderstood, and Socrates, and Jesus, and Luther, and Copernicus, and Galileo, and Newton, and every pure and wise spirit that ever took flesh. To be great is to be misunderstood. You're that smart.

Mostly Voices [17:29]

Let me put it this way. Have you ever heard of Plato, Aristotle, Socrates? Yes. Morons.

Mostly Uncle Frank [17:40]

Really? Now you mentioned Warren Buffett and you can see from Warren Buffett's history how he has applied these kind of principles. If you go back to where he started, he was a pure Ben Graham value investor. try to pick cigarette butts off the ground and see if you can get a few extra puffs on them is the way that was described. And he found that while that worked, it didn't work that well, and there were better approaches that one could take. So instead of just trying to buy the cheapest companies at the cheapest prices, he moved to buying quality companies at fair prices. which is what Charlie Munger added to him. Now that was inconsistent with what he was doing before, but just because we were doing something before doesn't mean we should continue to keep doing it. Consistency itself is not a primary value and can end up being a crutch. And if you look more at Warren Buffett's investing, he used to say, I'm not going to invest in technology companies because I don't understand them. But now when you look at Berkshire Hathaway today, for a while he had a good size investment in IBM, realized that wasn't working, what he needed was a better technology company. So now Berkshire Hathaway owns lots and lots of Apple. And the reason he was able to do that is because he wasn't wedded to past thought patterns. The reason I think that's important for us as do-it-yourself investors is that personal finance and this sort of investing as individuals has not been around that long. Only really since the 1960s or 70s did people even start thinking about doing this.

Mostly Voices [19:36]

And so as we've gotten up to 2020, there are a lot of ideas that may have made sense in 1970 or 80 or 90 that make a whole lot less sense today or have just been debunked. Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys? Forget about it.

Mostly Uncle Frank [19:47]

Unfortunately, a lot of where financial media is in particular is just repeating old shibboleths from 20 or 30 years ago without really questioning whether they're still valid. A good example of one of those is this silly idea that you should take 100 minus your age and that should be Risk Parity Radio, Frank Vasquez, risk parity, risk, parity, Frank, Vasquez in the audio.

Mostly Voices [20:29]

Make sure to boost the words Risk Parity Radio, Frank Vasquez,

Mostly Uncle Frank [20:33]

risk parity, risk, parity, Frank, Vasquez in the audio.

Mostly Voices [20:43]

Are you stupid or something? Honestly, as stupid as a stupid doves.

Mostly Uncle Frank [20:47]

That's wrong and we need to do better and we need to as do-it-yourself investors question rules of thumb or practices that have been around longer than say a decade to see whether we know better now or have better options today. Because frequently we do.

Mostly Voices [21:03]

You need somebody watching your back at all times.

Mostly Uncle Frank [21:07]

But let me read another snippet from this essay and see if you recognize it. There is a time in every man's education when he arrives at the conviction that envy is ignorance, that imitation is suicide, that he must take himself for better, for worse, as his portion; that though the wide universe is full of good, no kernel of nourishing corn can come to him but through his toil bestowed on that plot of ground which is given to him to till. The power which resides in him is new in nature, and none but he knows what that is which he can do, nor does he know until he has tried. Many men have tried. They tried and failed? They tried and died. And here's another one. My life is not an apology, but a life. It is for itself and not for a spectacle. I much prefer that it should be of a lower strain, so it be genuine and equal, than it should be glittering and unsteady. And just one more. I am ashamed to think how easily we capitulate to badges and names, to large societies and dead institutions. Now, although that was all written in 1841 and was based on speeches and sermons that Emerson was giving in the prior decade, it still sounds very modern and still sounds very actionable, and it is. And what's also interesting about it to me is that it was written to be spoken. And so if you read other famous speeches and things from that era, often they reflect or sound like Emerson. For instance, here's a quote from Lincoln from one of his famous speeches. The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise to the occasion. As our case is new, we must think anew and act anew. We must disenthrall ourselves, and then we shall save our country. That is pure Emersonian dialogue, even though it was written about 25 years after this particular essay. I should say more like 22 or 23 years. And so thank you for inquiring about that and allowing me to go off on that tangent. And that, as much as anything else, led to my drinking problem. But now we must move on to more mundane things. Last off. Last off, we have an email from Andrine.

Mostly Mary [23:57]

And Andrine writes, hello, I'm listening to your podcast from Switzerland. Shout out to all the Swiss people out there. I'd like your opinion about the FTSE All-World GDP-weighted index and why isn't there a GDP-weighted ETF in the US market, at least to my knowledge. What would you say about this index? To me, it sounds like the best of the best, since it would auto-rebalance as the US economy is surpassed by the Chinese economy in the coming decades, and other nations like Korea, Brazil, China, and India accelerate their growth. And if this crystal ball doesn't happen, it's fine too with a GDP-weighted ETF.

Mostly Voices [24:39]

Thoughts? Now, the crystal ball has been used since ancient times. It's used for scrying, healing and meditation. Switzerland, you say? Well, we better roll out the polo for that. I'll be risk parity, risk, parity, Frank, Vasquez in the audio. I bet you don't get to hear that on many podcasts these days. But we aim to add value here in whatever way we can. Ed McMahon's party machine! Yes!

Mostly Uncle Frank [25:58]

Now getting to your questions, I did go and take a look at this index, the FTSE All-World GDP weighted index. It's been around since about 2013 or 2014. and is another way of cap-weighting the world stock markets. So it has a lot less US in it and more emerging markets is really how you would characterize it. I have not found any ETFs based on this index or other funds, at least not tradable in the US, which kind of surprises me because these days there seems to be a fund for just about every index that's been invented. MSCI also has a GDP weighted index, and there is an iShares fund called ACWI, but honestly it's constructed differently than the FTSE index, and when you compare it with other international funds like the Vanguard Total World Fund, it performs about the same as that. As for what I think about these things, What I think is they're interesting, but I'm not sure this is a meaningful way to distinguish investments in particular stocks. And the reason that is, is while you can slice up things by country, that doesn't necessarily tell you whether the business headquartered in that country is that much different from a similar business headquartered in another country. It may be for various reasons, but it doesn't necessarily have to be. I think the best approach to slicing up the world stock markets these days is not by country, but by factors and by sectors. We talked a lot about factor investing and what that is back in episode 172, and I would go listen to that. But what recent academic studies and other papers have shown is that by slicing up the stock market, whether it's one country or multiple countries, into factors like size and value and volatility is a much better way to segment it and then be able to construct a portfolio that is well diversified in this area. So for instance, what seems most attractive to me these days is these newer ETFs that are put out by Avantis, which allow you to invest exclusively in small cap value stocks. So check out AVDV for small cap value in developed markets or AVES for small cap value in emerging markets. And those kinds of funds tend to have better diversification characteristics to either your large cap US total market, funds or international total market funds, including a GDP weighted index fund like we're talking about here. And the way we need to think about diversification is not in a narrative format, as in this looks or sounds different from that other thing, but in a quantitative format in the form of a correlation number or correlation analysis. because we ultimately care about is not whether it sounds different or looks different, but whether it actually performs differently in a way that is measurable. And I think factor investing and to a lesser extent, sector investing in particular sectors of the market is a much better differentiation or diversification mechanism than things like where the headquarters of a company is located or whether it pays dividends, or a lot of these other historical differences that you can point to, but are more differences in name than differences in performance characteristics. So if somebody puts out a fund that follows this particular index, I would be interested to follow it and see how it performs, but honestly, I would not expect it to be that useful ultimately. in portfolio construction because we have better options there on more differentiated factors. But it is interesting to think about and thank you for that email. But now I see our signal is beginning to fade. 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 question into the contact form there and I'll get it that way eventually. We'll be picking up this weekend with our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page along with probably some more emails. If you haven't had a chance to do it, Please go to your favorite podcast provider and like subscribe. Give me some stars like Jeff did. That would be great. Mmmkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Mary [31:58]

Father Hoffman. Hoffman also. 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.