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 [0:21]

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 [1:41]

Lighten up, Francis.

Mostly Uncle Frank [1:45]

But now onward to episode 202. And sorry for my voice today. Today on Risk Parity Radio we are going to do what we do best here. And so without further ado.

Mostly Voices [2:00]

Here I go once again with the email.

Mostly Uncle Frank [2:07]

First off we have an email from Andy. Now Andy has gone to the front of the line because he is one of our patrons on Patreon. I must be in the front row.

Mostly Voices [2:25]

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

Mostly Uncle Frank [2:33]

And if you do that, you will go to the front of the line for emails.

Mostly Voices [2:37]

Yes.

Mostly Uncle Frank [2:40]

All the money collected there goes to our Charity for this program, which is the Father McKenna Center in Washington, DC. I'd also like to remind and invite you to a fundraiser we are having there on September 10th. It is called the Walk for McKenna and several hundred people will be walking approximately three miles in the area around North Capitol Hill. And if you are interested in that and you are in the DC area, Please take a look at the link in the show notes for Walk for McKenna and you'll get a t-shirt out of it. We also have refreshments being supplied by the Dubliner, a local pub, although I understand there will not be any Guinness until after the walking is completed. That is the straight stuff, O' Funkmaster. But now let's take a look at this email. Andy writes：hello again, Frank. Thanks for the wonderful show and thank you, Mary, for reading my question.

Mostly Mary [3:38]

Marry, marry, why you buggin'? A few weeks ago on the White Coat Investor podcast, someone submitted a question about the buy, borrow, die strategy. Dr. Dolly weighed up the pros and cons from a tax perspective, indicating that it might be better to take a capital gain hit versus pay interest over the long haul. I am not totally sure, but I think you may have forgotten that with the borrow strategy, you still end up owning the asset and therefore it is still appreciated. over the long run. I was going to email him a follow-up, but then figured that your podcast and audience might be a better place to explore this in more depth. Yeah, baby, yeah! I realize that the borrow strategy carries increased risk, especially as the rates you borrow at are variable, but what else should I be thinking about when deciding whether I should start down this path? Assuming a risk parity style portfolio, Golden Ratio, say, and one that is large enough to comfortably support a 4% drawdown, i.e., let's imagine it won't run out. Does drawdown versus borrow result in a clear winner? Winner, winner, chicken dinner. Would it make sense to combine them? Maybe drawing down to feel the zero tax bracket. Many thanks, Andy.

Mostly Uncle Frank [4:59]

Well, Andy, I did take a listen to that. And just to orient everybody, what this buy, borrow, die strategy is, is it's something that is proposed to be used for taxable accounts or other taxable investments. And the idea of it is that while you are in retirement, instead of selling the asset to live on, you would borrow money against it with the idea that When you die, your heirs would get a stepped up basis on the entire amount and/or the borrowing would be paid for by interest and dividends, or at least partly paid for. I think this idea probably has only limited utility for most people. It is commonly used during life by people like Jeff Bezos who have essentially billions of dollars in taxable accounts through their shares in whatever company that they founded or worked for. And since their income is so high and their credit is so worthy, they can often get loans at the lowest possible rates, which makes sense in their cases, given what their tax situations are. I think this has a number of pitfalls if you're using it as a retirement strategy. The first being that it wouldn't apply at all to your retirement accounts, your IRAs, your Roth IRAs. The second is it's going to create a bit of a mess for your executor who will have to sell some of the assets to pay off the debts of the estate. And if you are using trusts in connection with that estate planning, it could get a lot more hairy and complicated. The third issue relates to uncertainty in that you're not going to be clear as to when you're going to die, especially if you're relatively young. And so these debts could amount to serious amounts over time. And the other thing that plays into that is if you're borrowing at a variable interest rate, that could go up substantially during that time. And that could also create a messy situation. Where this may make the most sense is with a less sexy thing that people already do, which is called a reverse mortgage, where you have an illiquid asset like your house and you want to get the money out of it. So you take a mortgage on that that works kind of like a HELOC and you continue to take money out of it and live on it and then Your creditor, the bank, will take the house in the end and may or may not give some residual value to your estate if there's anything left. So this is really not a very new idea. It's more of a repackaged idea. Forget about it. I think the better concept may be one of just trying to increase flexibility or liquidity by having lines of credit against your investable assets or other assets that might be available if you have a year when you just have large expenses and you don't want to be selling things and incurring extra taxes to deal with them. But I think it really belongs more in the area of short or intermediate term tactics and not as a principal long term strategy. Forget about it. But it's all going to depend on what you actually hold in your portfolio and your individual tax situation. Surely you can't be serious. I am serious. And don't call me Shirley. An interesting concept and thank you for that email. Second off. Second off, we have an email from Todd.

Mostly Voices [8:54]

Don't we look handsome, Todd? Thank you, Mrs. Lubner.

Mostly Mary [9:02]

And Todd writes, hi Frank, I'm loving your podcast. Choose a five people spoke highly of you, and that's something coming from them. I'm on episode 150, and although your analysis is always very thoughtful, I feel like you never speak enough about your personal trajectory. What were your steps to achieve financial independence? At what point do you consider yourself financially independent using risk parity methodology? And also, Who is Frank Vasquez and why should we listen to you regarding personal finance and investing? Thanks, Todd.

Mostly Uncle Frank [9:37]

Well, now these are some broad questions and topics that could cause me to drone on for hours on end.

Mostly Voices [9:44]

I could stand up here and talk on and on like some bow weevil sitting on a stump bragging to a dog in heat.

Mostly Uncle Frank [9:51]

But let's see if I can be reasonably brief and informative. First, our path to Phi. Well, our path to Phi was the fairly well-trodden American dream kind of strategy where you become highly educated, find highly lucrative jobs, in this case being a lawyer at a big law firm, and then live below your means for a couple of decades and then you're there. Fire!

Mostly Voices [10:17]

Fire! Fire! Fire!

Mostly Uncle Frank [10:24]

I had the advantage of growing up in a stable household and that my parents had done a lot of the heavy lifting even before I was born in terms of creating that stability. My father was an immigrant who became a doctor and he had an established practice by the time I came around. I'm the fourth of five children. You can't handle the dogs and cats living together. So I was born in Topeka, Kansas and grew up in Cedar Rapids, Iowa.

Mostly Voices [10:51]

I have a feeling we're not in Kansas anymore.

Mostly Uncle Frank [10:54]

Went to public schools there, then I went to Caltech in Pasadena, California, and then I went to Georgetown Law School where I met Mary and where we've remained ever since.

Mostly Voices [11:07]

He's a lumberjack and he's okay. He sits all night and he works all day.

Mostly Uncle Frank [11:15]

We spent most of the first decade after law school paying off our student loans and having a few children.

Mostly Voices [11:23]

He cuts down trees, he eats his lunch, he goes to the laboratory. On Wednesday, he goes shopping, and has buttered scones for tea.

Mostly Uncle Frank [11:31]

Interest rates were much higher back in the 1990s, so it was kind of a no-brainer. And then we started investing aggressively. in both tax deferred and taxable accounts. And by the time we got to around 2010 or 2011, it was clear that we were going to become financially independent sometime in the late 2010s on that trajectory. Yes, Cat, now I shall be ruler of the world. Now, I just spoke about my investment history back in episode 200, so I won't repeat that. And that includes how I came upon risk parity around 2010 or 2011, really, while I was trying to figure out, well, what should our portfolio look like when we become financially independent? Does that make you different than most everybody else? And the answer is yes. We really didn't have any magic secrets for getting to fi that you haven't probably already heard. I mean, besides Doing the best to increase income and investing aggressively, I suppose, what separates us from our peers is just avoiding lifestyle inflation.

Mostly Voices [12:47]

You are correct, sir, yes!

Mostly Uncle Frank [12:51]

And so we lived in a very small house until we had three children. We didn't buy a big house until we finished paying off our student loans. We try to only replace our cars about once every 10 years. My current one is a 2011 and going strong. It's ground pounding, heart stopping, quarter mile mayhem. And we never really got involved in expensive hobbies or fashion trends or belonging to clubs or any of those sorts of things that our attorney peers often do or did.

Mostly Voices [13:25]

Our main extravagances have been our children. Donate to the children's fund. Why? What have children ever done for me? in terms of their activities and educations and so on and so forth. I don't care about their children. I just care about their parents' money.

Mostly Uncle Frank [13:40]

And if you were looking for a rule of thumb out of that, you could adopt what I call the rule of half. And the rule of half is look around at your peers, wherever you work, whatever salary brackets you are in, and try to spend about half of what your peers are spending. Truth is, they're morons. Whether that's on food, cars, places to live, the whole package. And if you can do something like that or get close to it and invest what you're not spending, you'll probably get to financial independence in about 20 years. Philosophically, what's helped me on this path is adopting the ideas of a thinker named Rene Girard, who came up with the theory of Mimetic Desire. Now if you're looking for a summary of what that is, I think the easiest one to go to is a book written by a guy named Luke Burgess, one of those Silicon Valley characters. Anyway, he wrote a book called Wanting the Power of Mimetic Desire in Everyday Life. I'll link to that in the show notes, but it provides a good summary of what this is. But one of the central ideas of that theory of existence is that our desires beyond basic physical wants and needs are generally not our own or do not originate with ourselves but are merely copied from what we observe other people doing. And if you internalize that, you will begin to see desires as separate and apart from your being, and it's some kind of infection. that is foisted upon you simply because of the environment you happen to be living in.

Mostly Voices [15:22]

Advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don't need. Our great war is a spiritual war. How great depression is our lives.

Mostly Uncle Frank [15:38]

But that's probably enough of a frolic and detour on that for one podcast. Everything that has transpired has nothing to do with my design. At least a podcast that's supposed to be about portfolio construction. Oh, sure. One thing I forgot to mention about my pathway is that I think there's a useful book you may want to check out by Eric Barker. It's called Barking Up the Wrong Tree. And he's also got a blog where he talks about the psychology of success and other things. Anyway, in chapter one of that book he does go into the preferences and predilections of various people who become entrepreneurs or not. And part of it's a nature nurture kind of thing. But the upshot is, is that you if you are good in school and can follow rules, so on and so forth, your easiest pathway may be the one that I took becoming highly educated, becoming a professional, and succeeding in that manner. But there are many other people whom that really doesn't work for, who would be better off with small businesses or other individual kind of pursuits or in sales. And it's just a nice chapter reminding us that the right path for one person is not going to necessarily be the right path for Another person or everybody in general. You need somebody watching your back at all times. So try to be mindful of that when you're raising your children. Now getting to the fun question. Who is Frank Vasquez and why should we listen to you regarding personal finance and investing? I'm funny how? I mean funny like I'm a clown. I amuse you? Well, maybe you shouldn't.

Mostly Voices [17:38]

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

Mostly Uncle Frank [17:45]

And I am reminded that many of the reasons that people give or use for following particular advice or gurus or whomever are fallacious. For example, there's the appeal to popularity. Everybody else is doing it. Everybody else is following this person. Everybody else is taking this advice. You should do it too. That is a natural human inclination, but I'm afraid I'm probably not going to win on that score, as my popularity is certainly limited. We only have a thousand listeners here willing to put up with me. But I aim more for quality and not quantity.

Mostly Voices [18:22]

If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. Let him step to the music he hears, however measured or far away.

Mostly Uncle Frank [18:38]

The second fallacious argument I might raise for following me is the appeal to authority or exclusivity, which are usually related. Now the way I might package that in my case is that I'm only one of a few hundred people walking this earth that went to Caltech for undergraduate and then went on to law school.

Mostly Voices [19:02]

Top drawer, really top drawer, with an even smaller number that has a pension

Mostly Uncle Frank [19:06]

for finance. Now the elder statesman of this august group, as somebody you may have heard of, his name is Charlie Munger, works for a small outfit called Berkshire Hathaway. So maybe you would be attracted to that little fallacious marketing ploy as a reason to listen to me.

Mostly Voices [19:27]

Always be closing, because only one thing counts in this life. Get them to sign on the line which is dotted.

Mostly Uncle Frank [19:36]

But I think really the reason that you should listen to me is that I'm on the same pathway that many of you are on, but just a little bit further down the path.

Mostly Voices [19:48]

Well, you haven't got the knack of being idly rich. You say you should do like me, just snooze and dream. Dream and snooze, the pleasures are unlimited.

Mostly Uncle Frank [19:59]

Most of the audience I interact with through this program are already successful do-it-yourself investors. The best, Jerry, the best. Who are just looking for more knowledge and information about what to do next now that they've reached a certain level of success.

Mostly Voices [20:14]

Au contraire. Don't be saucy with me, Bernaise.

Mostly Uncle Frank [20:20]

And I'm happy to share what I've learned Along the path and hopefully you can make some use of it. Now, why might you want to follow the information that I would provide you as opposed to the information provided by somebody else? Well, that kind of depends on your goals. The goal that I have with respect to portfolio construction here for retirement is to maximize the projected safe withdrawal rate. through better portfolio construction, with the idea that I want to spend more of our money while we are alive and not leave as much when we're dead. Dead is dead. Now, I don't know of many other people that take that approach, although I'm sure you can find them. The more common approach I see people taking is just to reduce their spending to such a low amount that they're not going to run out of money regardless of pretty much what they invest in as long as they're not burning it up in a trash can. Dan, it's gone! Now there's nothing wrong with that approach, especially if you do want to leave a lot of money to your heirs, but you also might be leaving some of life on the table with that approach. And what I mean by that is if you are scrimping and saving and spending your time, say, taking care of your house and not paying anybody else to do it because you think you can't afford it, or not engaging in travel or activities or creating family events because you think you can't afford it, yet you're going to be leaving a large fortune to some people or organizations who will be only too happy to spend it. You do have to ask yourself whether that was an efficient use of the last part of your life. You could ask yourself a question. You could ask yourself a question. Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys? But in order to be comfortable spending more, you do have to orient your portfolio to that end. And use the best information available to hopefully achieve that, which is what we're trying to do here. We had the tools, we had the talent. Which leads me to the other reason that you might want to listen to me as opposed to somebody else is that I'm actually doing what I'm talking about doing. My portfolios actually look like the bread and butter portfolios that we talk about in sample portfolios. And I am following a simple leave it alone, don't tweak it too much, and rebalance it on a schedule. So when you are listening to somebody giving this kind of advice, one of the things that should be in the back of your mind is, well, how is this person actually managing their own portfolio? Are they following this advice that they are dispensing? In many cases, they are not. And then you have to ask, why? Some of them are just not living off their assets. So it doesn't really matter what they do with them. And that includes the people who have not retired yet because they're not old enough, or the people that simply choose to keep on working and making money off their businesses. And so do not really have a need for the money they've accumulated. A good example of that is Rick Ferri, and I'll link to a nice video in the show notes where he talks about his personal portfolio. and considerations. And in his case, he doesn't plan on stopping working anytime soon. He's making plenty of income from what he does, and so does not really have a need for the portfolios he's accumulated. So what he's done is left it in a 65-35 kind of portfolio now, but he actually plans to let it drift to a higher equity allocation with the idea that he can leave more money to whomever is getting it next. So we're not doing that because I'm not in that situation. We do not intend or plan to make enough residual or continued employment income to live off of and we'll be relying on the assets we've accumulated. Now, other popular voices in this kind of planning have chosen plans for themselves that involve trading or some form of market timing. So for example, Bill Bengen, the author of the 4% Rule, has adopted both an extremely conservative portfolio and follows some kind of trading methodology as to when to get in and out of markets, which he has talked about on several interviews recently. Similarly, Bill Bernstein has gone extremely conservative. I think he's got 30% or less in stocks in his personal portfolio. But he's also quite up there in age and doesn't want to think about market fluctuations anymore. Somebody like Carsten Jeska, big earn, trades options on S&P futures. So his portfolio looks completely different than any kind of buy and hold or simple stock bond combination portfolios. Paul Merriman is a good example of somebody who knows themselves and their psychology. A large portion of his retirement portfolio is split into a 50/50 stock bond portfolio. The stock portion is essentially the Merriman Ultimate portfolio, and the bond portion is treasury bonds for the most part. He also has another segment of his portfolio that is managed I believe by his old firm, and involves some market timing. And he will freely admit that he has under spent what he has accumulated, but he also knows his own psychology. And it works very well for him. All I'm really trying to say here is that there are theoretical footsteps and practical footsteps. And I think what you should probably be most interested in from anybody you listen to is what are the practical footsteps they have been taking and would that make sense for you given what your situation and goals are? Theoretical footsteps are useful and nice to think about, particularly if you are a long ways away from relying on the money you've accumulated. But at a certain point, the rubber is going to hit the road, assuming you are going to rely on that money. And you're going to have to make some concrete decisions. And at that point, you may want to be looking more at practical footsteps than at theoretical footsteps. It's all the same to you. I'll drive that tanker. And finally, one other reason you might want to listen to me has to do with my lack of conflicts and blunt presentation style. You can't handle the truth. There are two kinds of conflicts I see in this space. There are hard conflicts and soft conflicts. The hard conflicts are when you have advertisers or some newsletter or book you have written or some other kind of affiliation that makes it difficult or uncomfortable for you to criticize a particular idea. And I always like to go back to that Upton Sinclair quote which goes something like, it is difficult for a person to understand something when their salary depends on them not understanding it.

Mostly Voices [28:09]

A guy don't walk on the lot lest he wants to buy. They're sitting out there waiting to give you their money or you're gonna take it.

Mostly Uncle Frank [28:17]

And that can manifest itself either directly or tacitly. More often it's tacitly than directly. Directly is when you are advocating for something that is in fact bad for most consumers.

Mostly Voices [28:29]

I drink your milkshake.

Mostly Uncle Frank [28:33]

Tacitly is when you have a program and you fail to criticize an idea that is raised that you know is bad or you believe is bad for the people that are listening to you. Now the soft conflicts are a little more interesting to me and they have to do with the way personal finance and financial media works. And the way it largely works is as an entertainment vehicle.

Mostly Voices [29:03]

What do you mean funny? Funny how? How am I funny?

Mostly Uncle Frank [29:06]

And so the unwritten rule is I'll scratch your back if you scratch mine. Meaning, if you hear somebody else's content and you don't agree with it, you either avoid the topic and the disagreement or kind of pussyfoot around the subject matter. And the idea there is that presenters of content are in a different boat from the consumers of the content. And so the presenters of content know that in the long term, They want to be in the good graces of other content producers so they can cross pollinate, get in each other's shows, support each other in many ways. And there's nothing wrong with that in principle, but it does create this soft conflict where your interests as a content producer are not necessarily aligned with the people consuming the content. And so the difference about me, I suppose, is that I don't necessarily play that nice in the sandbox with the other content producers. I want you to be nice until it's time to not be nice. And the reason for that is not that intentional. The reason for that has to do with my professional background and what I've spent the past couple decades doing. And one of those things has been cross-examining technical and financial experts. Yeah, that's smart.

Mostly Voices [30:36]

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

Mostly Uncle Frank [30:47]

Really? It is that combination between having backgrounds in engineering and economics, which are largely cooperative professions, relatively speaking, and then going into a combative profession like law and in particular litigation. And so I have a natural inclination whenever I read something, particularly presented as expert material to go after it and look for weaknesses in it, bad assumptions, and anything else that I can find that's wrong with it. Wrong! And I know that can make me sound impolite and that it decreases my popularity, but I just can't resist. I just can't resist. Mr. Madison, what you just said is one of the most insanely idiotic things I have ever heard.

Mostly Voices [31:41]

At no point in your rambling, incoherent response were you even close to anything that could be considered a rational thought. Everyone in this room is now dumber for having listened to it. I award you no points, and may God have mercy on your soul. And it's so it is kind of a double-edged sword in that it's a reason for some people to want to listen to me and for others to Another group of people not to want to listen to me.

Mostly Uncle Frank [32:08]

But you know something? You're all right! But thank you for that email allowing me to make such a self-indulgent presentation. I'm happier than a pig in slop. Last off. Last off, I actually see our signal is beginning to fade. So we'll hold off on the next set of emails until next time. 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 questions into the contact form and I'll get them that way. 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. M'kay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Voices [33:16]

He's a lumberjack and he's okay. He sleeps all night and he works all day. He cuts down trees I wear a he'll suspenders and a I wish I'd been a girly, just like my dear Papa. I cut down trees, I wear a heel to fancy and a scarf. I wish I'd been a girly, just like my dear Papa.

Mostly Mary [33:43]

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.