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, and 9. 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 [1:41]

Lighten up, Francis.

Mostly Uncle Frank [1:45]

But now onward to episode 195. Today on Risk Parity Radio, we're just going to do what we do best here, which is have at our backlog of emails.

Mostly Voices [2:01]

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

Mostly Uncle Frank [2:07]

And first off, we have two emails from my contact info. Oh, I didn't know you were doing one. Oh sure.

Mostly Mary [2:19]

And really they're just references to two links, but My Contact Info writes... Frank, I thought these articles might be of interest given recent dialogues on Vanguard ownership structure and correlations.

Mostly Voices [2:31]

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

Mostly Uncle Frank [2:35]

Alright, I don't think we need to belabor these things too long, but let's just go through them. The first one is A article about why somebody is not leaving Vanguard.

Mostly Voices [2:46]

And my reaction to it is, well, Ladi freaking da. That's fine.

Mostly Uncle Frank [2:54]

You don't need to leave Vanguard if you're there and you like being at Vanguard. I think people get their personalities wrapped up in brokerages sometimes and it's kind of weird.

Mostly Voices [3:02]

Don't be saucy with me Bernaise.

Mostly Uncle Frank [3:06]

When you think about it, these brokerages are It's kind of like the car you drive. Sure, you may like them for whatever reason, but they're not you. They are just essentially containers for your investments, your brokerages and your funds. They are not the investment itself. And so what most of us are looking for at a brokerage is that it's low cost, efficient and easy to use. And I think the operative word here is always enough. It's low cost enough. It's efficient enough. and easy enough to use for whatever you're trying to do. It doesn't work for me. And there are many choices out there that are probably good enough for what you are trying to do. A few of them have specific features that you may be interested in. For instance, if you wanted to trade in fractional shares, Fidelity is going to be a better option than say Schwab or Vanguard. If you wanted to trade on margin, Interactive brokers is going to be a better option than just about anything else. But if you have a brokerage and it has everything you need, then there is no reason to go running off and finding another brokerage. It's like driving your car. If your car works fine for what you need to do with it, you don't need to go out and buy another car. Forget about it. At least not until you have a different need or something happens to your car. It's a different calculus if you don't already have a car. I don't understand. I made a reservation. Do you have my reservation? If you need to go buy a car, then you are going to start researching cars and looking at what their features are.

Mostly Voices [4:39]

Yes, we do. Unfortunately, we ran out of cars.

Mostly Uncle Frank [4:43]

Just like the way you would say research brokerages, if say you had a 401k you wanted to roll into a new IRA, and you were like, well, where am I going to put this?

Mostly Voices [4:55]

But the reservation keeps the car here. That's why you have the reservations. I know why we have the reservations. have reservations. I don't think you do.

Mostly Uncle Frank [5:07]

For most people today, fidelity is going to be like the Toyota Camry of brokerages. It'll work just fine for most people. And that's whether you have $100 to invest or $100,000 to invest or more. Yeah, baby, yeah. It hasn't always been the best or easiest place to open an account. It won't always be in the future. But it will be good enough. Vanguard is probably good enough for many people. Schwab is good enough for many people. Maybe E-Trade, maybe Interactive Brokers, maybe Empower. I would not sweat this too much. Forget about it. Because you want to focus on your actual investments and not the containers that they happen to be in. And the next link is an article from Vanguard about 60/40 portfolios, and it is the counter to the common headline that always says the 60/40 is dead because we see that headline every year. It's just a clickbait headline. This article makes the point that correlations are not static over time. Sometimes stocks and bonds are more correlated in one period of time than in others, but over time they sort of average out. In a way, and you can read the article. And you might want to hear more about correlations in the context of treasury bonds. In that case, go back to episode 176. Listen to that and look at the paper we talked about there.

Mostly Voices [6:36]

That is the straight stuff, O Funkmaster. And thank you for your emails. Second off, we have an email from William.

Mostly Uncle Frank [6:49]

And William writes, hi Frank, as a member

Mostly Mary [6:53]

of Choose FI, I have always liked your commentary in that group.

Mostly Voices [7:01]

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

Mostly Mary [7:05]

I recently found your podcast, Love It, and listened to the earlier ones that you and Karen recommend, and I'm listening to you each week. I am 63, retired at 55. I have no pension and will wait to collect Social Security until 70. My wife will be 63, where it will cover approximately 70% of my expenses, so I feel that I can be a bit aggressive. Do you have any recommendations or commentary on my portfolio? The Fidelity Select Funds, along with TLT, had been outperforming VTI until more recently. I am looking to eliminate my BND as it is not negatively correlated to my stock funds. 60% of my net worth is in taxable and 40% in retirement accounts. I am withdrawing from taxable to keep income low and thus ACA costs low. Here is my portfolio. Cash 5% FSRPX eight percent. TLT eight percent. FSCSX eight percent. VTI 55%. Fsmex eight percent. BND eight percent. Best regards, will. All right.

Mostly Uncle Frank [8:28]

Commentary on your portfolio, you say, or you ask. I want you to be nice. First of all, from the macro perspective, yes, you are going to have a lot of flexibility if this portfolio is only supposed to cover a small part of your expenses. You did not tell us what the size of the portfolio is versus what expenses it's supposed to cover though. And I think you need to make that calculation. Because if it's 3% or less, you can hold just about anything between 25% stocks and 100% stocks based on either personal preferences or if you desire to have more growth over time and leave money to somebody else or do something else with it, that's fine. It's when you're trying to maximize that safe withdrawal rate that you really need to focus on being more diversified in a portfolio than this portfolio. portfolio is. But if you're looking for something more growth oriented, yeah, this will be fine. I would not describe it as a risk parity portfolio, but a traditional stock bond mix kind of portfolio. All right, let's look at the stock portion of this portfolio. You have 55% in the Vanguard Total Stock Market and then 25% in three Fidelity Select Funds. So that's an 80% allocation to stocks overall. The first thing I like to think about when looking at the stock portion of a portfolio is what is the value and growth mix to it? Because that is the easiest form of diversification is to have about half of your stocks in growth related funds and half of your stocks in value related funds, at least for diversification purposes in a retirement style portfolio. the easiest way to see what your basic growth value mix is, is to go over to Morningstar and put your funds into their fund analyzers and click on the little portfolios tab and it'll give you this style box which tells you where it fits on the growth and value spectrum and also on the large cap, small cap spectrum. When you look at this portfolio, it's heavily tilted towards large cap growth. All three of your Fidelity Select funds are in the large cap growth sector. VTI leans towards large cap growth. And so what you should know out of that is that this portfolio is going to be more volatile than a more diversified portfolio that had some small cap and some value in it or just some value in it, even it was just large cap value.

Mostly Voices [11:11]

I'm telling you, fellas, you're going to want that cowbell.

Mostly Uncle Frank [11:15]

It's going to perform much worse in times like the ones we've had where there's a lot of inflation and other things going on. And if you compare the performance of value stocks year to date with the performance of growth stocks year to date, you'll see that pretty starkly in this environment. If we have periods like we've had since 2010, this kind of portfolio will outperform the stock market. And so you need to be aware of the pros and cons of both of those things.

Mostly Voices [11:44]

You need somebody watching your back at all times.

Mostly Uncle Frank [11:48]

Now, these three Fidelity Select Funds are a form of concentration and they are concentrated themselves in particular stocks. One of them is 25% in Amazon, one of them is 25% in Microsoft, and one of them is 25% in two companies in the medical device sector. I think one of them is Danaher, I can't remember what the other one is. So you are essentially betting on the performance not only of those sectors, but on those particular stocks. You could ask yourself questions. Do I feel lucky?

Mostly Voices [12:20]

Do I feel lucky?

Mostly Uncle Frank [12:24]

Now individual stock picking is really not something I do. I think to do it right, you have to analyze individual companies and in this case, also individual business sectors. And if you go through that analysis and feel like these particular stocks or sectors will outperform the market over long periods of time, then go ahead and invest based on that information. However, I would not invest in funds just because they've outperformed recently or in some time period without actually doing the work of doing the analysis of what's in the fund. You have a gambling problem. Because if you are just picking things on good recent performance, and when I say recent performance, 10 years is recent performance in my book. To get out to average performance, you need 25 years. 25 years. Gosh. And it has to go through at least a few different economic cycles.

Mostly Voices [13:23]

Girls only want boyfriends who have great skills.

Mostly Uncle Frank [13:27]

So the wrong way to have selected these funds would be on recent performance hoping they're going to continue that performance. That is an amateur mistake and is why amateurs tend to underperform their own holdings. Because what they do is they're buying high hoping it'll go higher and then if it doesn't they at some point dump the fund and go and buy something else that happens to be on a roll. And if you do that over and over again you will underperform the stock market indexes. So if you're going to hold these things, you need to be really confident and hold them like Warren Buffett, meaning pretty much forever. Even if they have a bad decade, you would continue to hold them. The other thing you should recognize about these funds is they have a higher expense ratio than, say, index funds. They're in the, I think, 0.65 or 0.68 percentage on the expense ratios. One way to get around that would be to Hold the individual stocks in these funds. Take the top 10 in each one and actually hold those individual stocks. It's a form of direct indexing. It's a lot more work. And I'm not saying I recommend it. I'm just saying if you wanted to hold the same thing and get around or get away from an expense ratio, that's how you can do it these days because we have no fee trading and you can buy fractional shares. I think I've mentioned it before, I actually do that with a fund called KBWP, which invests in property and casualty insurance companies. I view that as part of my value portfolio, but instead of buying that fund, I own the top 10 stocks in that fund. And it creates a complication, but I'm fine with that. I like fiddling around with things like that with part of my portfolio.

Mostly Voices [15:14]

Well, you have a gambling problem.

Mostly Uncle Frank [15:20]

You could do the same thing with these groups of stocks and then you could also adjust how much of it you're holding. So maybe if you don't want to be holding that much Amazon, Microsoft, or those other medical device companies, you could cut down the percentage of what you're holding there. But then you're veering off into a form of direct indexing, which you may find entertaining or you may find very annoying. You can't handle the gambling problem. Certainly would require more work on your part. So in some ways, you have a tilt towards growth, in particular large cap growth. If you wanted to diversify that, you would take a portion up to half and put it in value stocks. I gotta have more cowbell. I gotta have more cowbell. I mean, you could just take that straight out of the VTI if you really like these. concentrated select funds on your growth side, that would give you a more diversified portfolio that's going to handle, say, the kind of environment we have right now much better than what you've got. But there's nothing wrong with this holding if you understand what it is, what it can do, and you are confident that you are going to keep holding it and not be jumping in and out of funds when they underperform, because they will underperform.

Mostly Voices [16:31]

You can't handle the crystal ball.

Mostly Uncle Frank [16:35]

A company like Microsoft was down for 13 years between 1999 and 2012. And that could happen again to one of these companies. We just don't know which one and we don't know when it's going to happen. We don't know.

Mostly Voices [16:49]

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

Mostly Uncle Frank [16:53]

All right, moving to these bonds in particular, the fund BND. Yeah, I agree that there's Probably no reason to hold that fund in particular unless you just not sure what you're doing. I know nothing, nothing. Because it does not do anything well. It holds a hodgepodge of long-term and short-term bonds, some corporate, some treasuries. The name Total Bond Fund is a misnomer. It does not hold all the bonds in the universe. It does not hold any tips. It does not hold any high yield. It holds only a smattering of foreign exposure, but you probably don't want a lot of that stuff anyway. What I would do is go listen to a episode of the Choose FI podcast where I was interviewed about this topic. It's episode 194 of the Choose FI podcast. And we talk about the three basic purposes for bonds, which are diversification, income, and stability. If you are looking for diversification, Yes, you do want those long-term treasuries or intermediate-term treasuries. And I'm talking about specific diversification from stock funds. If you were looking for primarily stability, you would go to short-term bond funds, whether that's short-term treasuries or short-term corporates, short-term tips, they all perform about the same because they're all short-term bonds. And as for income, it's very difficult to get income out of bonds these days. Although with the higher interest rates, there are possibilities. Even short-term bonds are yielding above 3% right now. They're yielding more than long-term bonds. Usually you would look to municipal bonds in a tax account, high yield bonds, preferred shares, those sorts of things. It doesn't sound like that's anything you're really interested in, so I'm not going to spend any more time on it because you do actually lose a lot of diversification by holding those sorts of things because they end up being positively correlated with your stock funds. That's not an improvement. But move to treasuries for diversification. And the last thing is your five percent cash. I really don't have too many or too much of a comment to make on that. That could also be invested in I bonds or some kind of short-term bonds depending on how you're using them and how much access you need to whatever portion of it you need. But you generally want to keep that in your taxable account because you want your main growers to be growing in tax-advantaged accounts. And just one other thing I forgot to mention. It is always a good idea to take your portfolio and stick it in the Portfolio Visualizers asset correlation matrix, both to see the relative correlations of the funds you have, and also to look at the standard deviations and return profiles. And what you'll find in this instance with those Fidelity Select Funds is they do have reasonable diversification from VTI in the 0.7 to 0.8 range. It's not significant diversification but not bad overall. But they do have higher standard deviations over time as well, which is to be expected with the concentrations that they have. a normal thing you would see, that concentrated funds will have higher standard deviation viS-A-Vis the rest of the market. But I now believe that is enough on that portfolio and thank you for that email.

Mostly Voices [20:26]

Last off.

Mostly Uncle Frank [20:37]

Last off, we have an email from Peter.

Mostly Voices [20:41]

What about Peter? Oh, right, okay. Peter, sure, let's just put him up for adoption right now, save the kid a lot of agony. I mean, obviously, no Peter, no dick, no rod.

Mostly Uncle Frank [20:51]

And Peter writes, hi, Frank and Mary,

Mostly Mary [20:55]

I love the show and all of the knowledge and insight you are bringing to the community. Thank you. You're that smart. Let me put it this way.

Mostly Voices [21:02]

Have you ever heard of Plato? Aristotle, Socrates, yes, morons.

Mostly Mary [21:08]

I have, hopefully, a quick question. I am currently holding all of my investments in VTSA X and following the J. L. Collins simple path to wealth strategy. After listening to your podcast and doing a couple of simulations in portfolio charts, I am thinking of diversifying my all stock portfolio a bit and splitting my holdings between VTSA X 50% and VSIAx 50% to capture more of the market. I would like to exchange VTSAx for VIoV, but Vanguard will not allow me to do that exchange in my retirement accounts. Do you think this is an okay time to make this move from VTSAx to VSIAx with the market being down? Or should I hold off until my current portfolio recovers? I would like to retire in about eight years and start pulling from my investments in nine years. I would like to stay in 100% stocks until this time and then transition over to your golden ratio portfolio. My retirement date is not a hard date, but just a goal. I would be 51. My current portfolio consists of the below percentages and the moves I would like to make are below. I would move my traditional IRA from VTSAAX to VSIAX. I would then rebalance using my Roth IRA. Would you recommend this strategy or should I just leave the portfolio alone in VTSA X 18 brokerage leave in VTSA X 20 Roth IRA leave in VTSA X 48 traditional IRA move to VSIA X 14 401k leave in WFSPX. Thank you in advance for all your help and recommendations. Sincerely, Peter Could I come home and think that I've been fishing all day or something? That's really not what I do, Peter.

Mostly Voices [23:09]

However, the good news is I think I can help you.

Mostly Uncle Frank [23:16]

Actually, that is what we do here. Well, let's just talk about this a little bit. I think you do want to make this transition, whether you do it now or a little bit later. You want to be thinking about what does the stock portion of my retirement portfolio, what is that going to look like and start moving towards that and whether that means buying small cap value now or transitioning over some period of time. There's no real rhyme or reason to that work because we're still talking about 100% stock portfolio that you are accumulating in. But it's going to be better to get that kind of lined up into whatever configuration you want for the stock portion of your golden ratio portfolio at the end. Because then that's just one less thing you have to fiddle with. And over long periods of time, I can tell you that a 50% VTSAX and 50% small cap value does outperform just a total market over decades of time. So there's no reason not to do that now if it's tax efficient.

Mostly Voices [24:24]

I got a fever and the only prescription is more cowbell.

Mostly Uncle Frank [24:31]

And if somebody said to me, what is the most basic stock configuration that I might want to hold in my retirement portfolio, it would be essentially half large cap growth and half small cap value. 'Cause it's a very simple way to diversify and you do capture that value component that you do want in a retirement portfolio when you're drawing down on it.

Mostly Voices [24:57]

Before we're done here, y'all be wearing gold-plated diapers.

Mostly Uncle Frank [25:05]

And just so you're aware, VSIAx is the same as the ETF VBR, which is Vanguard's other small cap value fund. It's slightly less smaller and less valuey than VIoV, but it certainly is fine as a small cap value fund. And in terms of tax efficiency, yes, it is best to buy and sell things in your IRAs than in your brokerage account, unless you are selling at a loss, in which case you could do some tax loss harvesting. But I assume if you've been holding it for a long time, there's a big gain there in your taxable account. and so I would not go there first in terms of making exchanges. I think the other thing you need to think about is this big picture question of when are you going to retire and when are you going to transition to your retirement portfolio? That is mostly dependent on your expenses, your annual expenses, because really once you've won this game, you can transition to your retirement portfolio before you retire and you should probably do that. It's much less risky than going up to the brink and saying, okay, now I'm going to retire and I'm going to make these changes. If you had set that retirement date as a hard date, and I know you haven't, but if you set it as a hard date, you don't want to be walking up to the brink there and then ending in up in some kind of environment like we're having right now. we're making the transition may be painful. The ideal time to make a transition from your accumulation portfolio to your retirement portfolio is when you have accumulated enough so you know it's going to cover expenses and when your portfolio is at or near an all-time high. And then after you've made that transition, you can just kind of cruise into retirement and pull the plug on that. Whenever you're ready and not have to worry about making a big adjustment in your portfolio as you're losing your primary source of income. That is not desirable. You haven't got the knack of being idly rich.

Mostly Voices [27:13]

You say you should do like me, just snooze and dream. Dream and snooze. The pleasures are unlimited.

Mostly Uncle Frank [27:22]

And then finally, I should just note that remember that the version of the golden ratio that we are using is a sample version of that portfolio. and you could create different variations of that depending on your preferences. If you want to hear the first episode where we talked about it, it's episode number six. But we also talked recently about it in episode 192, which you probably already heard when we were talking about the rebalancing in it. So in particular, in that sample portfolio, for example, we have three funds A large cap growth fund, a small cap value fund, and a low volatility fund. I think the simplest version of that would just be large cap growth and small cap value. But that portion of that stock portfolio could have any number of variations in it, so long as they add up to that 42% for that portion. And then if you look at the smallest portions, we have 10% in a reit fund in there. and 6% in cash, and those can be changed to whatever suits you. In particular, if you're going to hold REITs, you probably want to hold individual REITs and put them in your retirement accounts. So please do look at that sample portfolio as a sample of an implementation of an idea. Yes! Because I do not believe in one portfolio to rule them all. There can be only one! And thank you for that email. But now I see our signal is beginning to fade. We will pick up again this weekend with our weekly portfolio reviews, and I think continue to hack away at this pile of emails, since we are more than three weeks behind now. 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 and I'll get it that way eventually. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, Give me some stars, a review. That would be great.

Mostly Voices [29:48]

Okay.

Mostly Uncle Frank [29:52]

Thank you once again for tuning in.

Mostly Voices [29:57]

This is Frank Vasquez with Risk Parity Radio signing off. So you know how to take the reservation, you just don't know how to hold the reservation. And that's really the most important part of the reservation, the holding. Anybody can just take them.

Mostly Mary [30:13]

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.