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. Yeah, baby, yeah!

Mostly Voices [0:51]

And the basic foundational episodes are episodes 1,

Mostly Uncle Frank [0:54]

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.

Mostly Voices [1:28]

Top drawer, really top drawer, along with a host

Mostly Uncle Frank [1:31]

named after a hot dog. Lighten up, Francis. But now onward to episode 209. Today on Risk Parity Radio, it is time for our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com, On the portfolios page. But before we get to that, we do have an email. We're just gonna do one today because it's another long email with a long answer. Surely you can't be serious. I am serious. And don't call me Shirley. And so without further ado.

Mostly Voices [2:10]

Here I go once again with the email. And?

Mostly Uncle Frank [2:14]

First off, second off, last off. First, second, and last off, we have an email from Kevin.

Mostly Voices [2:23]

Feeling seven up, I'm feeling seven up. Feeling seven up, I'm feeling seven up. It's a crisp, refreshing feeling, crystal clear and light. America's drinking seven up, and it sure feels right. Feeling lucky seven. Kevin, stop singing. Seven. Huh? And Kevin writes, Hi, Frank.

Mostly Mary [2:49]

I'm writing about safe withdrawal rates and how they relate to risk parity portfolios and early retirement. My wife and I are both 41, live in our fully paid off home in the suburbs of Cincinnati. I'm living on the air in Cincinnati. Cincinnati, WKRP. Drive 16-year-old yet still reliable Hondas and and have full remote jobs in the tech sector.

Mostly Voices [3:19]

Yeah, baby, yeah.

Mostly Mary [3:23]

While our jobs are fine, we both look forward to more time flexibility and using our skill sets on things we find more interesting. E.g., within a year after we quit, I want to try to build an internet-based side business for fun money. In August 2021, we transitioned our portfolio into a modified golden butterfly allocation because the market run-up had gotten us close to what we've long considered was winning the game. Since then, we've been working to get crisp on what our financial independence number truly is. For years, we've been targeting a $2 million taxable value to bridge the period until tax advantage accounts become readily available and $4 million total portfolio value. We'd like to use this $2 slash $4 million goal to fund an annual withdrawal of $120,000 per year, a 3% safe withdrawal rate, where 66,000 funds our monthly expenditures, and 54,000 covers taxes, prescriptions, health, home, and auto insurance. This year, we've been running an experiment where we live on that 66,000 per year, and it's going well. We've had an average of 2,200 excess funding available most months, which would be used to pay for larger infrequent capital expenditures after we quit. eg, home improvement, travel, and cars. While this year's bear market has brought the portfolio balance down, our taxable and tax advantage balances are both about 1.6 million for a total portfolio value of 3.2 million as of the end of July 2022, for a 3.75% safe withdrawal rate. I do a lot of personal finance research, listening to a host of podcasts, reading books, and have even paid for a few fee-for-advice sessions with financial advisers. Everybody seems to have a different perspective on what a safe withdrawal rate for a couple in their early 40s really is, and that rate dramatically impacts what our savings goal needs to be. For example, the Pure Financial Folks, you, Money, you, Wealth podcast, Wade Pfau, retirement researcher, retirement income style podcast, and Roger Whitney, retirement answer man, tend to say 2 to 2.5% for people targeting a 50-plus year retirement. The Abound Wealth folks, the Money Guy podcast, says 3 to 3.5%. Kitsis says it depends, but using that formula, our portfolio could support 3.6%. Karsten Jeska and his Safe Withdrawal Rate toolbox with our numbers suggests 3.25%, with a 0% failure rate, 3.5% with a 1% failure rate. Lastly, of course, your focus is on allocations that can support much more, with portfolio charts showing that our modified golden butterfly can support 5.5%. Most of this guidance ignores asset allocation entirely or, when it factors it in, downplays it, citing that style factor premiums may not persist. These ranges have us needing to save an additional $2.8 million for a 2% safe withdrawal rate or already being financially independent, 3.7% plus safe withdrawal rate. So settling on a number has a dramatic impact on our time horizon. What do you recommend a wannabe early retiree do with all this conflicting information and guidance? Thanks so much for using some of your retirement to share your knowledge. I've learned a tremendous amount from your show and remain a dedicated listener. Bows to his sensei. Bow to your sensei.

Mostly Voices [7:05]

Bow to your sensei.

Mostly Mary [7:08]

Thank you, Kevin. Kevin, stop singing.

Mostly Uncle Frank [7:13]

Alright, so your basic question is, what do you recommend a wannabe early retiree to do with all this conflicting information and guidance?

Mostly Voices [7:21]

Forget about it.

Mostly Uncle Frank [7:25]

Well, my basic advice is to follow Bruce Lee, which is to absorb what is useful, discard what is useless, and add something that is specifically your own. And that's one of our theme quotes for this podcast. That is the straight stuff, O' Funk Master. And so in order to do that in this situation is I think you need to understand some of the limitations on some of these sources. Man's got to know his limitations. And put on your critical thinking hat to really look at it from a critical perspective. And I think we'll just do some of that right here, right now. Let's do it. Let's do it. But before I really get into it, let me just preface this. with a couple of thoughts. First, I tend to agree with 85 to 90% of what these folks have to say, and so do all of them collectively, but I do not think it's very interesting for somebody who's studied a lot of this to just hear the same agreements over and over again. And that would be more interesting and more informative is to focus on the areas of disagreement. and the reasons for those disagreements.

Mostly Voices [8:47]

I want you to be nice until it's time to not be nice.

Mostly Uncle Frank [8:55]

My second point is I tend to approach these ideas the way I did my career. And I spent most of my legal career working with financial and technical experts and then cross-examining financial and technical experts. And so I tend to take a much more confrontational approach to ideas about personal finance than you might hear elsewhere.

Mostly Voices [9:23]

Have you ever heard of Plato, Aristotle, Socrates? And I know it does not sound polite.

Mostly Uncle Frank [9:27]

Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys? But it is also a sign of maturity that we separate people from their ideas. that just because we disagree with a person on a particular idea doesn't mean we think they're a bad person or that there's some reason to discount everything they have to say. But in that context now, let's take a critical view of what some of these gurus and other folks have to say and look at some of the weaknesses and problems with some of their approaches. I think there are three basic categories of problems that I see with some of what these folks are doing. I've spoken my piece and counted to three. She counted to three. She counted to three. And I would categorize them as intellectual laziness as category one, a desire to appeal to popularity as category number two, and conflicts of interest as category number three. And now these categories are overlapping and not mutually exclusive, but I had to organize it some way and this seemed like a good approach. So let's talk about intellectual laziness. This goes directly to the idea of foolish consistencies and how it manifests itself is this. Oftentimes gurus or experts are known for particular ideas that they've held for a long time, and they may have written books upon it in the past or taken some position in the past, sometimes over a decade ago, that they really wish to stick to. To me, this is kind of like a favorite song approach, that if you ask anybody what their favorite songs are, it's probably the music they were listening to in their teens or twenties. for most people. Probably why you hear so many things from the 70s and 80s on this podcast in relation to popular culture.

Mostly Voices [11:31]

Frank settled down out in the valley and he hung his wild years on a nail that he drove through his wife's forehead. He sold used office furniture out there on San Fernando Road and assumed a thirty thousand dollar loan at 15 and a quarter percent, put a down payment on a little two-bedroom place.

Mostly Uncle Frank [11:54]

And while that approach is fine for a lot of things that are purely involving personal preferences, that's not really the way we should be thinking about personal finance. Personal finance is an evolving thing involving a series of best practices that are continually evolving over time so that those best practices do change over time. So, for example, when somebody starts saying, well, I learned how to use mutual funds at Vanguard back in 2008, and so that's the only approach I'm going to take for the rest of my life. That's like saying, you still want to use blackberries or flip phones. It's no longer a best practice. It still works and you may want to keep it, but you may not for various reasons. One of the crutches I hear often is the phrase personal finance is personal. While that is true for individuals, you can do anything you want, that does not mean that your personal practice or thought from 15 years ago is objectively a best practice. That's not how it works. That's like saying, well, personal health is personal, therefore it's okay if I smoke A pack of cigarettes every day. I'm as stupid as stupid does. So whenever you hear that phrase, personal finance is personal, ask yourself, is this just somebody trying to be polite to somebody else who is not trying to apply best practices? Because if you hold yourself out as a guru or an expert, I would expect that you are continually updating your knowledge base as to what are best practices in the field that you are talking about. And if you're not doing that, you should not be holding yourself out as an expert. The other phrase that I often hear that is something you should think of as a red flag is when you hear somebody say, I'm not a fan or I am a fan of a particular investment. or personal finance idea. Because the idea of being a fan or not a fan is also an idea that is a personal preference and not a best practice. I'll be honest with you. I love his music. I do. I'm a Michael Bolton fan. For my money, I don't know if it gets any better than when he sings when a man loves a woman. For example, I am a long-standing Kansas City Chiefs fan going back to Super Bowl four. which is the first Super Bowl that I saw on television. And that was a pretty bumpy ride for a number of decades until recently. But whether or not I was a fan of the Kansas City Chiefs did not make the Kansas City Chiefs a better or worse football team. That's not how any of this works.

Mostly Voices [14:48]

And now I realize that experts and gurus

Mostly Uncle Frank [14:52]

often just use that as a polite way of saying that they disagree with somebody. But it's also used as a shield for either not having thought something through or not having updated one's knowledge base. Whether somebody is a fan or not is not a useful standard for us to be thinking about. That is a subjective standard. What we should be thinking about is what are the objective standards or best practices in investing in portfolio construction. And I mean best practices in 2022, not best practices in 2009. I mean, just because somebody won a Grammy sometime, does that mean you should still be listening to them? Michael Bolton?

Mostly Voices [15:41]

You know, there's nothing wrong with that name. There was nothing wrong with it until I was about 12 years old and that no-talent ass clown became famous and started winning Grammys.

Mostly Uncle Frank [15:53]

All right, now let's talk about some examples of this intellectual laziness. The first one in portfolio construction is the failure to consider or analyze any kinds of portfolios that are not just a simple stock fund and a simple bond fund. That was the best we could do back in the 1990s when Bill Bengen was doing his original research, we can do a lot better today. And best practices say we should be attempting to analyze more diverse portfolios. Portfolios that are divided up by Fama-French factors like small cap value and large cap growth, what people call style factors sometimes, and portfolios that involve specific kinds of bonds, not just some big total bond fund or one kind of bond. We shouldn't be assuming that all kinds of bonds perform all the same for this purpose. And we should be including alternative investments because all of these options are now available in the year 2022 to us do-it-yourself investors through simple and inexpensive exchange-traded funds.

Mostly Voices [17:07]

We had the tools, we had the talent.

Mostly Uncle Frank [17:10]

We're not living in 1995, we're not even living in 2005, we're living in 2022. So let me give you a positive example of this and a couple of negative examples. Positive example is what Bill Bengen has been saying in a couple interviews in the past couple years and will appear in this book that he's writing if it ever comes out. But he said that by making his portfolios more diversified, he could increase the projected safe withdrawal rate from his original research. from about 4.2 to about 4.7. And a lot of that was just adding something like small cap value to the mix. And that is an example of somebody updating their best practices in this area. Now let me give you a couple of negative examples, and I will name names. As we discussed in episode 40 of this podcast, Carson Jeska had done a hundred year study of the use of gold in a drawdown portfolio. And this is reflected in his Safe Withdrawal Rate Series post number 34. You should go read it if you haven't read it. And he determined that adding 10 to 15% in gold into a simple stock bond portfolio would improve its safe withdrawal rate. Now other people have done similar research. I will link to A video by the YouTuber known as Next Level Life, who does a lot of videos about portfolio construction, and he has arrived at similar findings about the addition of gold to a drawdown portfolio. Now, I do not know of anyone who has been able to actually contradict this research or has any legitimate criticism of it, but I do hear a lot of illegitimate reasons for not Applying it and not using it as a best practice. What is the first one you always hear? Oh, I'm not a fan of gold. I'm not a fan of gold. You know, gold doesn't care if you're a fan or not. Get over it. You can't handle the truth. The other crutch excuse I hear is, well, I don't know how to value it because it's not a bond with an income stream or a stock. with a profitability stream. Okay, that is either just ignorance or intellectual laziness about valuation methods. And I will tell you, I spent a lot of time cross-examining valuation experts. What you're really saying there when you say something like that is that the only way you can think of to do a valuation is through a discounted cash flow analysis. That is only one methodology for valuation, folks. If you don't know that, you need to go back to school, because every time you say, I don't know how to value something that's not a stock or a bond, you are saying that you are ignorant about principles of valuation. That's what you're saying. It's not a good excuse for not using another kind of asset class. It may be difficult to value, You may need to use market values or comparables or some other method of valuation. But that excuse, I don't know how to value something that's not a stock or a bond, is not legitimate. Forget about it. And it's only going to fly and mislead people who know less than you do. So maybe it's time to up your games about valuation methods and how people use these things. All right, now let me give you another specific criticism on a failure to analyze anything but a stock bond portfolio, a simple stock bond portfolio. And this one I think is even more egregious. I recently heard an interview of Wade Pfau on a podcast and YouTube video, which I'll link to in the show notes, from Resolve Asset Management. And they asked him whether he'd ever analyzed things other than a simple stock bond portfolio for purposes of safe withdrawal rates or anything else. And the answer was no. No, he had not done it. All he could give them was an excuse that was, well, I did a modeling exercise where you could assume anything you wanted based on the model and the variables you stuck in. But that's not an analysis. That's not an answer to that question. The other thing he assumes is that all portfolios have the same safe withdrawal rate. That all portfolios have the same safe withdrawal rate. Of course, what he's assuming is that all portfolios have some kind of stock bond mix. That's all they have. And that all portfolios have a stock bond mix that's somewhere between, say, 40 and 70%. But that seems to be his baseline assumption that all portfolios have the same safe withdrawal rate. That is obviously not true, but it's convenient.

Mostly Voices [22:18]

Ooh, how convenient.

Mostly Uncle Frank [22:22]

And he also likes to rely on some study he did some time ago, 10 or 15 years ago, where he analyzed safe withdrawal rates of simple stock bond portfolios in 23 different countries or a whole bunch of different countries. And based on that study, he likes to say that the safe withdrawal rate is one or two or some really low number. Of course, he's including countries that were ruled by heinous dictatorships that had hyperinflation going on, wars in their territory, and all sorts of things. But the point is he has not updated his priors. He has not done the analysis. He is not employing best practices when it comes to portfolio construction. and that's by his own admission. All right, next example of general intellectual laziness, and that is the inappropriate reliance on the concept of reversion to the mean. Now, in general, from a mathematical or statistical point of view, the concept of reversion to a mean will apply when you're looking at things that are Gaussian or normal distributed and that have predictable risk characteristics. So like throwing dice. If you throw two dice long enough, they will revert to the mean, which is seven. Now it is a fundamental error to assume that the concept of reversion to a mean applies in domains that are not described like that. normal distributions with predictable outcomes. And so when you're in areas like financial markets in which the mathematics is generally fractal and chaotic and outcomes are not predictable, you cannot and should not assume that the concept of reversion to a mean is going to apply. You may not even have a stable mean to apply this to. And so whenever you see or hear somebody blindly or casually applying the idea of reversion to a mean in financial markets, it's probably wrong.

Mostly Voices [24:36]

Wrong! Or not useful.

Mostly Uncle Frank [24:39]

And you would have to show that it is in fact useful in some respect before you should accept the idea as something you should rely on. Now, one of the biggest specific failures of this kind of application in the past couple of decades here has been the attempt to use CAPE ratios or PE ratios to forecast future returns of the stock market. This idea was popularized in the early to mid 2000s when there was an observation that In the past, it appeared that stock markets reverted to some kind of PE mean that you could calculate. Now, of course, when people try to apply that prospectively, as in the past 20 years, it hasn't worked at all. It's been a huge failure because it appears that the mean, the PE mean, moves around. It's not stable. So the mean for the past 20 years does not resemble the mean for the 20 years before that. And so how does that play into these forecasts that you were talking about? It plays into these forecasts because a lot of these forecasters are still using this failed reversion to the mean of CAPE ratios as a basis for predicting what's going to happen in the future. And so anybody who's using that, you need to throw that thing out.

Mostly Voices [26:15]

That is not a best practice that's been proven to be A bad practice and a failed practice. 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.

Mostly Uncle Frank [26:30]

And this same problem applies whether you're talking about predicting future interest rates or predicting future stock market returns or anything like that. You simply cannot use recent past performance to predict future returns, which is what this methodology is trying to do. And I will link to this highly amusing article from 2011 of Morningstar talking to various people about predicting the next 10 years of returns. And of course, all the ones that were using this methodology were predicting returns that were abysmally low. And they were all wrong for the entire decade. Wrong! Wrong? Wrong! Right? Wrong! And so you would have to say if that methodology were to work in the future, it would be random circumstance or happenstance and have nothing to do with the methodology itself. You are correct, sir, yes. Anything you see or hear somebody talk about that is based on the idea of reversion to a mean in finance needs to be questioned. It doesn't mean that methodology can never be used. That methodology works well in predicting future outcomes of managed mutual funds, for example. Those do tend to revert to a mean, which happens to be an index fund minus the fees that the managed mutual fund operators are charging. I drink your milkshake. But that's the exception in finance, it's not the rule. All right, the next intellectual laziness or ignorance I see is the improper use of so-called conservative assumptions regarding, say, things like interest rates or returns or inflation. And this has to do somewhat with model construction. A lot of financial models being used require the user to input some kind of crystal ball guess as to what they think future returns are going to be for the stock market or some other asset class and maybe some future inflation rate. My name is Sonia.

Mostly Voices [28:49]

I'm going to be showing you the crystal ball and how to use it or how I use it.

Mostly Uncle Frank [28:56]

And the mistake here is that instead of using what they think is the most likely rate of return or rate of inflation or whatever, people are encouraged to use more conservative numbers to stick in as inputs into one of these things. And then what happens is this, because these are effectively compounding machines, the error is compounded over and over and over again, and so gives you a result that is going to be way outside of the norm due to the compounding effect. And this is just a result of people not understanding how their models or their model machines work, and that what they should be doing is putting in the most realistic assumptions that they can come up with not the most aggressive or the most conservative. Put in the most realistic assumptions and then hopefully what your model machine is spitting out is a range of outcomes because that's what you want to look at. And then to be conservative, then you go to the worst outcome in the range or near the worst outcome in the range. And that, for example, is how a Monte Carlo analysis works. that it gives you a percentage of probable success based on, say, 10,000 simulations on a given data set. But I know a lot of gurus are using these types of modeling machines, and I would reject the use of these types of modeling machines that come out with specific answers based on user inputs, especially if they do not create a range of outcomes. you do need to use models that give you ranges of outcomes. And then to, quote, be conservative, unquote, you don't mess around with your inputs. You look at the range of outcomes and go to one end of the range or not. But that is a lot of where these really low numbers come from, by the use of these bad modeling machines and then the misuse of these bad modeling machines by sticking overly conservative inputs into them because people don't really understand how the math works. All right, moving on to the next common example I see of intellectual laziness. And this has to do with the fact that the original projections for, say, the employment of the 4% rule had to do with a 30-year timeline. And what you will hear people say is, well, that only works for 30 years. Dogs and cats living together, Mass hysteria.

Mostly Voices [31:35]

When you hear somebody saying something like that, it means

Mostly Uncle Frank [31:38]

they don't understand how the math works. Your portfolio does not turn into a pumpkin after 30 years. Inconceivable. Let me repeat that. Your portfolio does not turn into a pumpkin after 30 years or fall off a cliff.

Mostly Voices [31:56]

40 years of darkness, earthquakes, volcanoes, the dead rising from the grave.

Mostly Uncle Frank [32:00]

You can easily extend out Safe withdrawal predictions to 40, 50, or even infinite years. That's what you call a perpetual withdrawal rate. And it doesn't do weird things out there. What it does is approach an asymptotic limit. So anytime you hear somebody say, it only works for 30 years, you know they're either ignorant or intellectually lazy.

Mostly Voices [32:28]

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

Mostly Uncle Frank [32:32]

Because the calculation can be extended for any number of years for any portfolio. And I will give you a link to a portfolio charts calculator in the show notes where you can check out an example of that and how it's done. The honest truth is, if you look at the math, there is not a big difference between 30, 40, and 50 years. Because if your portfolio is going to fail, it's going to fail a lot earlier So I think we can dispense with the mass hysteria about that. Real wrath of God type stuff. Now getting back to our list. The next one I find to be one of the most egregious things that nobody seems to want to talk about. And that is the failure to incorporate more favorable assumptions when it seems like it's warranted. And I'll give you a big one here. In the past 10 years or so, there's been a lot of good research done by David Blanchett and others about what is called the retirement spending smile. And what that is, is an observation that retirees do not tend to spend as much money or inflate their spending as quickly as people who are still working. And this again is a well accepted assumption by everybody these days that an average person's retiring spending is going to go down or at least not keep up with inflation after they retire. And if you look at how inflation is measured, you'll see why that almost has to be true most of the time. The reason it has to be true most of the time is that One third to 40% of your CPI inflation rate or other people's inflation rates is attributed to shelter housing and another 15 to 20% is attributed to transportation. Now, most people who are retired have a couple of favorable situations involving their housing and their transportation. And we're talking about more than half of somebody's inflation right now. That's what I'm talking about. And that is this, they either own their homes outright or have a fixed rate mortgage, so they don't have an inflation rate. They have an inflation rate of zero for their housing or close to it. And they're not required to commute anymore, so their transportation expenses also go down close to zero unless they're doing something exotic and individual to their circumstances. But they certainly have the choice of keeping their transportation expenses extremely low and not inflating at the rate that the average working person has to deal with. So that confirms that this data about the retirement spending smile is correct and that we should be assuming a lower rate of inflation for retirees than is reflected in the CPI. and it's something like half of the assumed inflation rate. Now, how does that play into something like the 4% rule? The 4% rule on the spending side assumes that you are increasing your spending every year by the rate of inflation. But as we know, that is not an accurate assumption. We know that now, or we should know that now. We all agree on it. So if you incorporate that assumption, if you adjust the inflation assumption into the 4% rule, what happens? Michael Kitces wrote a blog post about this in 2014 that everybody seems to ignore. And what does it say? I'm going to link to it in the show notes. It says that based on just that factor, just that factor, we are probably telling people to save 20% more than they need in retirement. Gosh, idiot. So you need to go back to all those expert guru projections that you were just looking at and ask yourself, are they assuming that your personal inflation rate is going to be the CPI or they are assuming that it's going to be the average rate for real retirees? I bet you most of them have not incorporated this very well-known assumption that needs to be incorporated in anybody's retirement planning. No more flying solo. And if you apply this more reasonable assumption that just happens to be favorable, these people are probably overestimating what people need to save for retirement by 20%. and it is intellectually lazy for them not to make that kind of adjustment given what we know today. Again, best practices. Now just as an aside, the best practice for your own retirement planning is not to use inflation as a basis for withdrawals or modeling your withdrawals. That's why you focus on your own individual expenses. because you can look at your own individual expenses, which are going to reflect any inflation that applies to you and then plan based on that, which will automatically incorporate your personal inflation rate. Another way of thinking about this is this, that if you believe somebody's projection that for whatever reason portfolio returns are going to be 20% less in the future than they have in the past. That is already accounted for by using a more realistic assumption on the inflation side, which has the effect of making up for that on the expense side of things. All right, I think we've spent enough time on intellectual laziness. No contrare. Don't be saucy with me, Bernaise. But just one more thought on that. I think the problem here can be summed up as experts or gurus adhering to dogma versus using flexible principles. And a lot of them have come up with self-imposed limitations on what people can invest in, which is dogma, or other ideas that may have been thought to be valid in the past but have turned out to be invalid or need to be updated or corrected, but they're still relying on that old Dogma. This is why I think our investing approach needs to be guided by principles and we have those three principles here. The macro allocation principle, the simplicity principle, and the holy grail principle. Because I'm not a fan of dogma, not at all.

Mostly Voices [39:31]

Not gonna do it, wouldn't be prudent at this juncture.

Mostly Uncle Frank [39:35]

Alright, the next big category I wanted to talk about was appeals or desires for popularity. with respect to experts and gurus. This also is kind of a soft conflict of interest or relates to that. And it has to do with there is safety in numbers. That if you are trying to appeal to the greatest numbers of people, the best ways to do that are to first simplify your message as much as possible into dogma, preferably, because it's easier for people to understand that. I got some baby steps for you right here. And then make sure you do not veer too far off of other people or experts in the space. Because what you're trying to do if you're trying to be popular is to cross pollinate with other experts in the space, appear on each other's shows, etc. In some ways this is like the adage that is said to apply to Asian school children that you don't want to be the nail that sticks out because you'll just get pounded down. So how do you see this manifested in personal finance and as it pertains to portfolio construction? One way is this ignoring of asset classes that everybody will adhere back to these kind of simple stock bond portfolios. because then they don't need to disagree on stuff. There's safety in those numbers. But it's interesting, once you leave this kind of personal finance expert guru kind of area and go over and listen to what the real professionals are doing at their hedge funds and other things, they don't have any trouble talking about embracing and using other kinds of asset classes or sub asset classes. in their portfolios and in fact they highly recommend it. I'm going to link to in the show notes a nice interview of a gentleman named Aunty Elmanen, a nice Finnish gentleman. This is a Resolv Asset Management YouTube video. And who is this person? Well he is the head of research at AQR Capital. That's Cliff Asness's place if you're looking for another name to hang your hat on. And he has a degree in economics and law from the University of Helsinki and then got a PhD in economics and finance at the University of Chicago. He wrote a famous book called Expected Returns back in 2011 and then has recently written another book about investing in an era of low expected rates of return. And so he's been on many, many podcasts recently talking about this book. And that first book he wrote is recognized as kind of a Bible of portfolio construction. And what he says basically in this book and on this podcast is that what they are really looking at to improve returns going forward, because he does have projections based on growth and other things that suggest that returns might be lower going forward for stocks and bonds. But what other things are they looking at? One of the things he is looking at is managed futures or trend following. Then he's also thinking about tilts towards various factors that include most prominently the value factor and low volatility and momentum. And the point of me mentioning this is that to contrast what the real people in the field are talking about and doing in this field of finance and portfolio construction with what you hear from personal finance guru types. And it seems to me that if the personal finance guru types are not cognizant of this kind of work that's been outstanding for over a decade now, have not read it, have not been able to incorporate it into any of what they do, they're really not doing their job. You had only one job. And I realized that might not be very popular, it might be hard to do, and it might lose you some subscribers who want you to say the same things you've been saying for the past 10 or 15 years. But to me, that's not a good reason for not updating our priors, and it's not a good reason for not adopting best practices. It's better to be the nails that stick out and that have something new and different to say about the topic. Another way this appeal to popularity and all singing the same tune manifests itself is the application of double standards to various asset classes. And this is something that's also mentioned specifically in that YouTube video I just mentioned. The example they give there is when the stock market has a bad decade, people just say, oh, well, that's just the way it works. When some other asset class has a bad decade, everybody freaks out and say, See, that can't possibly work. That is applying a double standard. But it goes hand in hand with this appeals to familiarity, which lead to popularity. but are little more than foolish consistencies when you think about it. Now I should also say that I am guilty of using double standards, but hopefully in a productive way. The double standard that I use is that I apply a much higher standard to people who claim to be experts, gurus, or other things. And that's why I am hard on them and what they have to say. I says, Pigpen, this here's a rubber duck and I'm about to put the hammer down. I don't think we as individual investors should be held to those kind of standards. And I would never criticize an individual in their portfolio the way I'm talking about these expert folks today. But now there's one more kind of appeal to popularity that I should have mentioned first, and that is the appeal of pessimism. We are hardwired to pay attention to pessimism. Because pessimism sells, and we subconsciously think that people who express pessimism are somehow smarter or in the know. This actually affects people who are pessimistic more themselves. People who are pessimistic think they are smarter than other people, whether they are or not. Those two things go hand in hand. Pessimism and self-confidence. and with respect to this topic, safe withdrawal rates, there's almost a bidding war out there to see who can be the most pessimistic and come up with the lowest safe withdrawal rate for whatever reason they've got. But usually when you look under the hood, you oftentimes see that this quote analysis unquote doesn't make a whole lot of sense. And I was very grateful to Michael Kitces and Bill Bengen for throwing a big bucket of cold water on that Morningstar report that came out last year that was full of nonsense and bad assumptions. And the bad use of CAPE ratios, by the way. So you shouldn't be impressed by people who come out with lower and lower numbers. You should be impressed by people that come out with higher numbers and can show you how to do it and how it's justified. That's what's impressive, not this relentless pessimism. Now getting to this final category, the conflict category. This manifests itself in a couple of different ways. The first is obviously if you are trying to be popular, the reason you're probably trying to be popular is to gain some kind of sponsorships, and that creates its own conflict of interest. both that you don't want to say things that would contradict what the sponsorships are offering or promoting.

Mostly Voices [47:59]

As you all know, First Prize is a Cadillac El Dorado.

Mostly Uncle Frank [48:03]

Anybody want to see Second Prize? And that in order to get the popularity, to get the sponsorships, you do want to appeal to that broad audience and so stay within some kind of a mainstream that is more likely to get you there and help you grow your audience. Something I tend to do a very bad job at.

Mostly Voices [48:24]

I don't think I'd like another job.

Mostly Uncle Frank [48:28]

The other conflicts come from people who are selling financial services or have financial advisory practices. They've come up with ideas that they may have been using for 10 or 20 years and telling clients, this is what you should do. There is little or no incentive for them to want to update their practices, because if they do, they'll have to explain that to all of their older clients as to why they hadn't done it before. And it's a big job, and it's a conflict of interest. The incentive there is to stick to their guns and repeat what they had said in the past and justify it, in any way they can because otherwise they could lose their clients or at least make them extremely uncomfortable if you have to go to your client and say, you, know what? What I told you 10 years ago, I think we can do something better now and this is what we ought to do. Or, I think that was a mistake. No financial advisor is going to say something like that to one of their clients unless they absolutely have to. And I should say that that is actually the subtle conflict with respect to trying to minimize or pissimize safe withdrawal rates. The real conflict for people selling financial services and financial products is that is a pitch for things like annuities, structured products and other high priced commission things that have built in so-called guarantees and other things. Because honestly, if you are really that pessimistic that you think that your safe withdrawal rate is 3% or less and you're over 40, you're probably better off buying a simple annuity. And certainly if you get to be 50 or 60 years old and you want to maximize your spending in retirement, but you think for whatever reasons, whatever some guru told you that your safe withdrawal rate is 3% or less, then you should not be wasting your time investing. Investing is really not for you, whether you're doing it or somebody else is doing it for you. What you should be doing in that circumstance is buying single premium immediate annuities and just living on the money because the annuity company is going to pay you more than you are willing to take out of your own portfolio. And they're going to take that money and invest it for themselves and make the profits that you would have had had you not listened to that guru told you can only take out 3% or less. Once you become that pessimistic about investing, you really have no business investing anymore unless it's for somebody else and you're just going to leave that money to somebody else and then you should invest as if you were them and not you. That is the only rational thing to do if you are that pessimistic. So do the math, get over it and go buy the annuity if that's what you really think. I will give you the link to the immediate annuities website in the show notes. You can look at what you could get since you don't want to withdraw the money from your investments and you'll be much better off taking that route than investing your money at all. Or maybe you should just rethink what these gurus are telling you because maybe it's not really very good advice because they're conflicted. But this all just does get back to Emerson's observation that it's very easy to be consistent and is what people fall back on because changing our minds and our approaches is uncomfortable and forces us to admit that maybe we didn't have the best idea in the past for whatever reason. But now that we know better, we can update our ideas and do something that is better a best practice. And stop being fans of particular ideas or, say, formations in football and start being coaches who regularly update their knowledge base so that they can perform better and advise better in the future.

Mostly Voices [53:10]

You need somebody watching your back at all times.

Mostly Uncle Frank [53:13]

Because if your approach to personal finance and these issues is as if it were an immutable science like physics, you're doing it wrong. It's a technology that needs to evolve as more information is learned and as better tools become available. And I think that would be the best question to ask most of these folks. What have you been wrong about in the past 10 years and how have you changed or remedied that situation or thought process? And if the answer is not much, maybe that's somebody you probably should not be listening to too closely or without a critical eye. or ear about what they're saying.

Mostly Voices [54:02]

Pin your ear to the wisdom post, pin your eye to the line. Never let the weeds get higher than the garden. Always keep a sapphire in your mind. Always keep a diamond in your mind.

Mostly Uncle Frank [54:25]

But now I think we've beaten this horse to death, Kevin, and I hope you found that interesting and informative on some level. And again, nobody should take what I have to say too personally.

Mostly Voices [54:32]

He didn't fall!

Mostly Uncle Frank [54:37]

I should also commend to you to go back and listen to episodes 160 and 163, where we talked with Karen about her portfolio construction and transition to retirement, and how to think about managing your withdrawals in retirement. to go with your expenses. Because my basic thought is that your keep the lights on expenses should be 3% or less of your portfolio. You can use one more percent for comfort and one more percent for extravagances, but that you should be willing to be flexible about how you do that. So I hope you go and check that out if you haven't already. And thank you for that email. And now for something completely different. And the something completely different will be our weekly portfolio reviews and monthly distributions of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page. Since this has been a very long episode already, we will move through this with alacrity. It is sufficient to say that it was another awful week in an awful month and an awful year. Actually, it wasn't too awful until the last couple hours on Friday. But here we go. In the markets last week, the S&P 500 was down 2.91% for the week. The Nasdaq was down 2.69% for the week. Gold was only down 0.66%. Long-term treasury bonds represented by the fund TLT were down 3.07%. REITs represented by the fund R- EET were the big loser. They were down 4.4%. Commodities represented by the fund PDBC were down 0.24%. Preferred shares represented by the fund PFF were actually up last week 0. 17% and our favorite asset class these days, the only one that seems to be working well is managed futures represented by the fund DBMF and they were up 0.30% for the week. Almost everything these days seems to be tied to the strength of the US dollar, which is reaching generational highs against other currencies, which as others have noticed seems to turn it into a wrecking ball for most financial markets. when that happens. Now moving to our seven portfolios. First one is this All Seasons Portfolio, a reference portfolio. It's only 30% in stocks in a total stock market fund, 55% in treasury bonds divided into intermediate and long term, and the remaining 15% is divided into commodities and gold. It was down 1.86% for the week. It's down 21.04% year to date. 7.84% since inception in July 2020. We will be distributing $28 out of it for October. That's at an annualized rate of 4%. It will come out of the cash that has accumulated from dividends and interest. We will have distributed $324 out of it year to date and $885 out of it total since inception in July 2020. Moving to our three bread and butter portfolios. First one is the Golden Butterfly. This one is 40% in stocks divided into a total stock market fund and a small cap value fund. It has 40% in bonds divided into short term and long term treasuries and the remaining 20% is in gold. It was down 1.29% for the week. It is down 17.6% year to date and is up 3.06% since inception in July 2020. For the month of October's distribution will be $38. It will come out of the Gold Fund, GLDM, which has been the best performer recently. It's at an annualized rate of 5%. We will have distributed $436 out of it year to date and $1,217 out of it since inception in July 2020. All of these portfolios started at about $10,000 originally. Next one is the Golden Ratio Portfolio. This one's 42% in stocks, 26% in long-term treasuries, 16% in gold, 10% in REITs, and 6% in cash. It was down 2.02% for the week. It was down 22.27% year-to-date and down 0.57% since inception in July 2020. We will be distributing $37 out of it for October. That's at a 5% annualized rate. It will come out of cash as it does for this portfolio every month. We will have distributed $432 out of it year to date and $1,213 out of it since inception in July 2020. Next one is the Risk Parity Ultimate Portfolio. This one was down 1.85% for the week. It is down 25.84% year to date and 5.21% since inception in July 2020. We'll be distributing $40 out of it for October. That's at a 6% annualized rate. It will come from the cash portion, which has accumulated over $40, just over $40 for a distribution. We will have distributed $493 out of it year to date and $1,413 out of it since inception in July 2020. Now we move to these experimental portfolios. We run hideous experiments here so you don't have to. These all involve leveraged funds and you can see how violent and volatile they've been. The first one is the Accelerated Permanent Portfolio. This one is 27.5% in a leveraged bond fund, TMF. 25% in a leveraged stock fund, UPRO. 25% in preferred shares PFF and 22.5% in a gold fund GLDM. It was down 3.7% for the week, it's down 42.32% year to date and down 19.6% since inception in July 2020. We'll be distributing $32 out of it from the preferred shares fund, the best performer for October. It's at a 6% annualized rate. we will have distributed $546 out of it year to date and $1,769 out of it since inception in July 2020. This one looks like it may be headed for a rebalancing during the middle of the month, as particularly the stock fund has dropped all the way down to about 18% of its total value. So if it drops any more, Relative to the other ones, we will be rebalancing it. Next portfolio is the aggressive 5050. This is the most leveraged and least diversified of these portfolios. It is 33% in a leveraged stock fund, UPRO, 33% in a leveraged bond fund, TMF, remaining 33% divided into preferred shares fund, PFF, and a intermediate treasury bond fund, VGIT. It was down 5.23% for the week, is down 49.92% year to date, and is down 24.23% since inception in July 2020. You can see that leverage is kind of a wrecking ball itself in these kinds of portfolios, which is why they're experimental. So we'll be distributing $29 out of this portfolio for October. That's at a 6% annualized rate. It's going to come out of the intermediate treasury bond fund, which is the best recent performer here. We will have distributed $531 out of it year to date and $1,777 since inception in July 2020. And now we move to our last portfolio, which is also an experimental one called the Levered Golden Ratio. This one's 35% in a composite leveraged fund called NTSX, which is The S&P 500 and Treasury bonds, 25% in gold, 15% in EREIT, Realty Income Corp, 10% each in a leveraged bond fund, TMF, and a leveraged small cap fund, TNA. The remaining 5% is divided into a volatility fund, VIXM, and a Bitcoin fund, GBTC. It was down 2.69% for the week, down 30.24% year to date and 25.9% since inception in July 2020. We'll be distributing out of it at a 5% annualized rate. That'll be $28 for October. It will come out of that volatility fund, VIXM, which is not surprisingly the best performer recently. We will have distributed $450 out of it year to date and $747 out of it since inception, which was just in July 2021. It is the youngest of these portfolios. And with that, we have concluded our portfolio review for this week and this month. And now I see our signal is beginning to fade. Just in time. I've done a lot of talking today. Shut it up, you. Shut it up, me.

Mostly Voices [1:04:23]

If you have comments or questions for me, please send them to frank@riskparityradio.

Mostly Uncle Frank [1:04:28]

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

Mostly Voices [1:05:00]

One night Frank was on his way home from work, stopped at the liquor store, picked up a couple of Mickey's Big Mouths, drank them in the car on the way to the Shell station, got a gallon of gas and a can, drove home, doused everything in the house, torched it, parked across the street laughing, watching it burn. all Halloween orange and chimney red. And Frank put on a top 40 station, got on the Hollywood Freeway, headed north. Never could stand that dog.

Mostly Mary [1:05:59]

[Speech] 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.