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 [0:38]

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. Yeah, baby, yeah! And the basic foundational episodes are episodes 1, 3, 5, 7, and 9. Some of our listeners, including Karen and Chris, have identified additional episodes that you may consider foundational. And those are episodes 12, 14, 16, 19, 21, 56, 82, and 184. And you probably should check those out too because we have the The finest podcast audience available. Top drawer, really top drawer. Along with a host named after a hot dog.

Mostly Voices [1:35]

Lighten up, Francis.

Mostly Uncle Frank [1:39]

But now onward to episode 207. Today on Risk Parity Radio, it's time for our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the portfolio's page. And it looks like we'll be partying like it's 1979 this week. As Jay Powell straps on some stilts and tries to look as tall as Paul Volcker did.

Mostly Voices [2:17]

It's called a freak. They're doing it tonight. And now us, we'll show But before we get to that, I'm intrigued by this, how you say, emails.

Mostly Uncle Frank [2:36]

And? First off. First off, we have an email from Arun.

Mostly Mary [2:44]

And Arun writes, hello, Uncle Frank. This is my second email to you. Thank you for answering my first one. Always learning something from your podcast. Thank you for sharing your knowledge. Forget about it.

Mostly Voices [2:55]

Question, what type of portfolio would you suggest

Mostly Mary [2:59]

for the below scenario? I can invest X dollars a month for Y years and let it sit for N years. After Y plus N years, I would like to start withdrawing at least 0.75 times dollars per month perpetually. The value of X would be less than 1000 and the value of Y would be 5 to 10 years. But depending on future need or market condition, it can stay longer or shorter. Ideally, I'd like to have N equals zero, but that might be too ambitious. Is there a tool to play with these variables that you know, and what type of portfolio would you suggest? More importantly, what can be a safe perpetual withdrawal amount one can realistically expect? Please shower us with your wisdom. Cheers, our own. Forgot to thank Aunt Mary. Hello, Aunt Mary. You are a wonderful addition to this podcast.

Mostly Voices [3:53]

Marry, marry, I need your hug.

Mostly Mary [3:58]

Cheers, Aaron.

Mostly Uncle Frank [4:03]

Well, this is an interesting question because it's one of those questions that has a complicated way of solving it and a simple way of solving it. And generally, when you're dealing with a world of future uncertainty, If you can find a simple way of solving something, it's just as or better than the more complicated solution. And if you want to read a book about that, read the book Risk Savvy by Gerd Gigerenzer, a German dude from the Max Planck Institute. But I'm not going to talk about that here today. I'll talk about the specific question you have. So, okay, the more complicated solution is to go to Portfolio Visualizer and to the Monte Carlo in particular. And they have there what they call a multi-stage planning tool. We have the tools, we have the talent. And so what that allows you to do is go through different phases of accumulation or deaccumulation, say how long that phase is going to be, and then input a particular portfolio and do Monte Carlo analysis on it. And I will link to that in the show notes and you can go play around with it to your heart's content. For any kind of accumulation portfolio, the thing that usually generates the highest returns is investments in stock market, 100% equity portfolios. So that's probably what I would start with or start guessing with in terms of what you're asking here. And then when you get to your decumulation phase, and want to be withdrawing in perpetuity, you're going to move to something that looks like a risk parity style portfolio or other kind of retirement style portfolio for that purpose. And that will give you the highest projected perpetual withdrawal rate going forward for that. But let's now approach this in a simpler way that we might do in the back of an envelope. Yeah, baby, yeah! So your key factor here is that you want to create a portfolio that generates or can be withdrawn from at a rate of 0.75x dollars per month perpetually. So say we use the 4% rule as a guideline as to how much that needs to be, which is a reasonable assumption if you are using a risk parity style portfolio for distribution purposes. So if 0.075x is the distribution amount, that is the 4%. To get to how much you would need, you multiply it by 12 for 12 months, and then you multiply it by 25, which is the inverse of 0.04. And so what you get is an amount of 225x. And so 225x is the amount that you need to accumulate to support this projected withdrawal. Now, how long does it take to accumulate 225x? Well, let's set the boundaries for that so you can understand how this works. One way of doing that would be simply not to invest the money at all or put it in a savings account and just save it. And so at a rate of 25x per year, you would save 225x in nine years. That's at a 0% rate of return. So that's one boundary. Now on the other boundary we can use the rule of 72, which I will also link to in the show notes, but it is a shortcut for using an interest rate and determining how long it will take something growing at that rate of compounding to double. So if you are assuming an interest rate of 8%, say, you divide that into 72 and so you know at that interest rate it will take about nine years for that amount to double at that rate and that's how you use the rule 72. Inconceivable. So you are talking of a period of 5 to 10 years to get to 225x. Now for something to double in five years that would be a rate of 14% using the rule of 72 for something to double in about 10 years, that would be a rate of 7% to double in 10 years. And why do we care about that? Because this gives you a starting amount that you might think of. So if you had today saved half of 225x, which is 112.5x, and you just invested it in some kind of portfolio. If that portfolio generated a rate of 14%, it would double in five years. If it generated at a rate of 7%, it would double in 10 years. And those rates are within the wheelhouse of a total stock market portfolio, which tends to have a nominal rate of return over the past 100 years or so of about 10.5%. Call it 10. So now let's put those two bounds together. We know you'll need to save at least 112x just to get the one doubling in the 5 to 10 years. The maximum you would need to save would be the whole thing, 225x. So what you need to save is somewhere between those two numbers over the period that you're talking about. and the earlier you can front load it, the more likely you are to get there in a shorter period of time. So what is the midpoint though between 112.5x and 225x? Since you know you're going to need to save somewhere in between there, the midpoint between those two things is 175x. Let's call it 180x to make it a little bit more conservative. That's approximately how much you actually need to save. and so say you decided you were going to save 180X over five years, that's 60 months, and that would be a required savings rate of 3X per month. So if X is $500, you need to save $1,500 per month, approximately, for five years. And to see how this might play out, suppose that your total return over that five years was actually not 7 to 14%, was actually zero. So at the end of five years, you ended up with 180X. and then suppose for the next three years then you had that 10% compounded annual growth rate. If you do simple calculator math then you end up with 239. 58x at the end of year eight, which gets you into the ballpark you're looking for. And I will put the text of your question in the show notes just so people can follow along with this again if they're really interested in nerding out about it on the back of their own envelope. But here's the more important question. Why is that simple calculation just as good as a more complicated calculation you might do? The reason is that because of the variance of your potential returns, you actually don't know what those potential returns are going to be. and whether they're going to be zero for part of that period or 20% for part of that period. And because you're talking about such a short period of time with a high degree of variance in something like the stock market, any precise estimate you would give or try to calculate, you know, is going to be wrong. Wrong. It's what you call a false precision. Right? Wrong. But on the other hand, you know if you make some general observations and calculations like we just did in the back of an envelope, you can pretty well get to kind of a range of where you need to be and know that you don't need to save 20x per month to get there. And that half an x per month is probably not going to get you there. And this is an example of an application of what is called the bias variance dilemma. which is one of my favorite statistical projection things to talk about. You can learn more about that in episodes 49, 66, and 137 of this program if you are interested. Don't be saucy with me, Bernaise. And you should be interested if you care about these kinds of projections. Yes! But enough nerding out on that, and thank you for that email.

Mostly Voices [13:03]

Class is dismissed. Second off, we have an email from Jeffrey.

Mostly Mary [13:16]

And Jeffrey writes：Frank, love the podcast. I have a question. You know how financial professionals will say never invest in the stock market unless you have a five to seven year time horizon? And it's gone. Poof. What would you say is the minimum holding period for a risk parity portfolio? Would you consider it an appropriate choice for someone saving for a specific goal in six years? Such as college or a house? Thanks, Jeffrey. Well, thank you for re-bringing this up.

Mostly Uncle Frank [13:50]

Yes, one good use of these kinds of portfolios, besides using them as retirement or distribution portfolios, is to save for intermediate term goals, particularly if that goal is not specific in terms of exact timing. This is how our eldest son saved to buy a house. and how he is saving to potentially buy another house. If and when that makes sense. He's using a golden ratio kind of portfolio and adding to it every month or whenever he has extra money to put into it. Donate to the children's fund. Why? What have children ever done for me? and it is just there in that extra pot between your cash and emergency funds and those sorts of things that you need for your short-term expenses and your long-term investments, which are mostly going to be in total stock market kind of funds. He's got this intermediate fund in between for these kinds of things. Now, I think the holding period here is a minimum of three to five years. for using something like a golden butterfly portfolio or a golden ratio style portfolio for one of these exercises. Historically, the maximum time for such a portfolio to recover from a drawdown has been about four years. That compares to a maximum recovery time for a 60/40 portfolio of about 13 years. So you can see there's a big difference there. And that recovery time is actually going to be shorter for any portfolio simply because if you are accumulating into this, you are essentially dollar cost averaging through any downturns that it might go through in the period you're talking about. So three to five years minimum is my answer and I'm sticking to it. I don't care about the children.

Mostly Voices [16:00]

I just care about their parents' money. And thank you for that email. Last off.

Mostly Uncle Frank [16:09]

Last off, we have an email from Chris and Chris writes,

Mostly Mary [16:13]

Shirley, you can't be serious about adding more foundation episodes.

Mostly Voices [16:17]

I am serious and don't call me Shirley.

Mostly Mary [16:21]

But if you were, I thought episode 184 where you spoke about what annuity you would consider and more importantly, When you would start considering it was a must listen to anyone approaching retirement. I have shared this with many people and they were so appreciative. Love the show. Keep up the great work as we need someone watching our backs at all times. Chris. No more flying solo.

Mostly Voices [16:45]

You need somebody watching your back at all times.

Mostly Uncle Frank [16:49]

Well, thank you for that contribution, Chris. And as you may have heard in the Opening intros, I have included it. I did go back and listen to it myself, just to recall what I said, and it actually did turn out pretty good.

Mostly Voices [17:05]

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

Mostly Uncle Frank [17:10]

And if you're wondering what I said in that episode, the short answer or upshot is that I don't think it makes sense for most people to be thinking about annuities until they get close to age 70. that you should only be looking at the simplest kinds with the lowest fee structures and that your health should actually be the primary consideration or a primary consideration. And so that trying to plan these things out earlier in life, say in your 50s, as many financial advisors want you to do to lock you into something.

Mostly Voices [17:50]

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

Mostly Uncle Frank [17:58]

It's probably not a good idea for most of us. It's not a very good process to use. It's better to have a process a little more flexible and that can change with the changes that may go on in your life that you cannot predict when you're only in your 50s. That's what I'm talking about. And thank you for that email.

Mostly Voices [18:18]

And now for something completely different. What is that? What is that? What is that?

Mostly Uncle Frank [18:26]

Well, what it is is our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com and once again, it did feel like the bees this week. No, not the bees! Not the bees! Ah! I love my eyes! My eyes! Ah! Looking at those very ugly markets, the S&P 500 was down 4.65% for the week, the Nasdaq was down 5.07% for the week, gold was only down 1.33% for the week, and long-term treasury bonds represented by the fund TLT were only down 1.28% for the week. What's been interesting about those is how far the yield curve is now inverted. At the beginning of the year, the one-year treasury bond was close to zero and the 30-year treasury bond was at about 2%. Now the one-year treasury bond has gone up to over 4%, whereas the 30-year treasury bond has only risen about 1.6% to around 3.6%. But that's a really good example of how the Federal Reserve really has a tight control over the short end of the curve and Not nearly as much control over what goes on at the long end of the curve. All that pressure got you down, has your head spinning all around. Last week we saw the completion of the inversion, whereas the 30-year Treasury bond is now at a lower interest rate than the 10-year Treasury bond. And everything else going to a back to about the six-month T-bill. Now moving on in the Parade of Horrors, REITs represented by the fund REET were down 6.63% for the week. They were the big loser. Commodities represented by the fund, PDBC were down 3.57% for the week. And preferred shares represented by the fund, PFF were down 3.15% for the week. Guess what was not down? Guess what was up for the week? Guess what? Managed futures represented by the fund DBMF were up 2.83% for the week. And that was largely on the ridiculous strength of the US dollar against foreign currencies, which is now at 20-year highs. And if it keeps going the way it has been, we'll break through those and be at 40-year highs. by the end of the year at this rate. That's also what's really thrashing funds with international components like that REET fund, which has international REITs in it. Because the dirty little secret of international funds is that they are, in fact, a speculation on the direction of the dollar in terms of its strength, and do a lot better when the dollar is weaker and do a lot worse when the dollar is stronger. Expect the unexpected.

Mostly Voices [21:31]

Now moving on to our sample portfolios.

Mostly Uncle Frank [21:35]

The first one is the All Seasons. This is a reference portfolio. It is 30% in a total stock market fund, VTI, 55% in intermediate and long-term treasury bonds, and the remaining 15% in gold and commodities, GLDM and PBDC. It was down 2.76% for the week, it was down 19.6% year to date, and it is down 6.26% since inception in July 2020. And moving to our three more bread and butter kind of portfolios. The Golden Butterfly, this one is 40% in stocks divided into a total stock market fund and a small cap value fund. It's got 40% in bonds divided into long and short term treasuries. and then the remaining 20% is in gold, GLDM. It was down 2.92% for the week. It is down 16.93% year to date and is up 4.25% since inception in July 2020. Moving to our next one, the Golden Ratio Portfolio is 42% in stocks and three funds, 26% in long-term Treasuries, 16% in gold, 10% in the refund R EET, the remaining 6% in cash. It was down 3.29% for the week, it was down 20.73% year to date, and is up 1.24% since inception in July 2020. Next one is the Risk Parity Ultimate. I won't go through all 14 of these funds. It does have a little bit of that DBMF in it. It was down 3.47% for the week. It is down 24.5% year to date and is down 3.68% since inception in July 2020. And now we move to these experimental portfolios involving leveraged funds. We run hideous experiments here so you don't have to in your own portfolios. We got a scary 140 this week. And we continue to have hideous results this year. The Accelerated Permanent Portfolio is 27. 5% in a leveraged bond fund, TMF, 25% in a leveraged stock fund, UPRO, 25% in PFF, Preferred Shares Fund, and 22.5% in a gold fund, GLDM. It was down 5.36% for the week. It was down 40.33% year to date. and 17.18% since inception in July 2020. The next one is our most leveraged and least diversified portfolio, the aggressive 5050. It's just stocks and bonds. It is 13 in a leveraged stock fund, UPRO, 13 in a leveraged bond fund, TMF, and the remaining third divided into preferred shares fund, PFF, and an intermediate treasury bond fund. VGIT is down 6.18% for the week and is down 47.38% year to date. Woohoo! It is down 21.01% since inception in July 2020. Horrible, twisted, freak. All going to show you that a little leverage can be a dangerous thing and a lot of leverage can be a gambling problem.

Mostly Voices [24:58]

You can't handle the gambling problem.

Mostly Uncle Frank [25:02]

And our third experimental portfolio is our newest one, the lever to golden ratio. This one is 35% in a composite S&P 500 and Treasury Bond fund called NTSX. It has 25% in a gold fund, GLDM, 15% in a REIT O, Realty Income Corp, 10% each in a leveraged bond fund, TMF, and a leveraged small cap fund, TNA. And the remaining 5% of this fund is divided into a volatility fund, which did fine last week, and a Bitcoin fund, which did not do fine last week. Anyway, it was down 5.24% for the week. It is down 28.43% year to date and is down 24.05% since inception in July 2021. It is a year younger than the rest of the portfolios. And so our miserable year continues. I've had several people ask me, well, what does this look like historically? And what it does look like is Jay Powell trying to imitate what Paul Volcker, the former Fed chairman, did back in 1979.

Mostly Voices [26:26]

or beginning in 1979, where he continually raised interest

Mostly Uncle Frank [26:29]

rates until there was a recession. And then interest rates fell fast and hard and the stock market began its bull market of the 1980s. However, what is clearly different this time is the strength of the US dollar versus other currencies around the world. In the 1970s, the dollar was falling in value from the end of the gold window until you got to this period with Paul Volcker and then only began to recover and start going back up in value against other currencies in around 1980 and ended up peaking in value sometime around 1986. Today, the dollar was already strong against other currencies. going into this and is just getting stronger. Which means if you think it's bad in the US, it's a lot worse everywhere else because of the strength of the dollar. What does this all mean for the future? Well, we can take a look at our crystal ball.

Mostly Voices [27:37]

As you can see, I've got several here, a really big one here, which is huge. and what does it say? We don't know. What do we know? You don't know. I don't know. Nobody knows.

Mostly Uncle Frank [27:51]

All it says to me is this is a really great time to be accumulating assets. So if you are in your 20s or 30s listening to this, you should be very happy to be able to buy into these markets during this big trough. What's that supposed to be? Some kind of stupid secret code?

Mostly Voices [28:12]

We can't tell you because you're not a member of the club. Oh, yeah? What does it take to be a member? Besides being a moron?

Mostly Uncle Frank [28:21]

How long it will go on is unclear. I would just keep steadily putting it in there because you'll be very happy with it later on.

Mostly Voices [28:33]

Sorry, Squidward, but you couldn't get in even if you tried.

Mostly Uncle Frank [28:37]

For those of us who are in decumulation though...

Mostly Voices [28:40]

Looks like I picked the wrong week to quit amphetamines, but I

Mostly Uncle Frank [28:44]

am confident we will survive.

Mostly Voices [28:48]

Fasten your seat belts, it's going to be a bumpy night. But now I see our signal is beginning to fade.

Mostly Uncle Frank [28:56]

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. 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. Mmmkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Mary [29:51]

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.