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 [0:37]

Thank you, Mary, and welcome to Risk Parity Radio. If you have just stumbled in here, you will find that this podcast is kind of like a dive bar of personal finance and do-it-yourself investing. Expect the unexpected. It's a relatively small place. It's just me and Mary in here. And we only have a few mismatched bar stools and some easy chairs. We have no sponsors, we have no guests, and we have no expansion plans.

Mostly Voices [1:11]

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

Mostly Uncle Frank [1:15]

What we do have is a little free library of updated and unconflicted information for do-it-yourself investors.

Mostly Voices [1:23]

Now who's up for a trip to the library tomorrow?

Mostly Uncle Frank [1:27]

There are basically two kinds of people that like to hang out in this little dive bar.

Mostly Voices [1:31]

You see in this world there's two kinds of people my friend.

Mostly Uncle Frank [1:36]

The smaller group are those who actually think the host is funny regardless of the content of the podcast. Funny how? How am I funny? These include friends and family, and a number of people named Abby. Abby someone. Abby who? Abby normal. Abby normal. The larger group includes a number of highly successful do-it-yourself investors, many of whom have accumulated multimillion dollar portfolios over a period of years. The best Jerry, the best. And they are here to share information and to gather information to help them continue managing their portfolios as they go forward, particularly as they get to their distribution or decumulation phases of their financial life.

Mostly Voices [2:35]

What we do is if we need that extra push over the cliff, you know what we do? Put it up to 11. 11, exactly.

Mostly Uncle Frank [2:43]

But whomever you are, you are welcome here.

Mostly Voices [2:47]

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

Mostly Uncle Frank [2:55]

So please enjoy our mostly cold beer served in cans and our coffee served in old Chippendale cracked mugs, along with what our little free library has to offer.

Mostly Voices [3:14]

But now onward to episode 210.

Mostly Uncle Frank [3:18]

Today on Risk Parity Radio, I think we need to hack away at some more emails here. We're still back in August on those. I will get caught up eventually, or more caught up. The thing is, Bob, it's not that I'm lazy.

Mostly Voices [3:32]

It's that I just don't care.

Mostly Uncle Frank [3:36]

But before we get to that, I have a little post script from episode 209. where we were talking about the overly pessimistic safe withdrawal rate projections that are commonly thrown around these days. And as luck would have it, what just came out this week in Wade Pfau's podcast, Retirement with Style, was a podcast about reasons why the 4% rule may be too pessimistic, and two of the items that he recognized there were that or ones that I specifically mentioned in episode 209. One was that the rate of inflation commonly applied to retirees is probably the wrong rate and that using the retirement spending smile assumptions from David Blanchett and others, the 4% rule was probably too low based on that assumption alone. And Wade has come back and given us a specific number now. He says that if you use the retirement spending smile rate of inflation for retirees, the safe withdrawal rate on Bill Bengen's original research would have been 4.7%, 4.7%. The second admission that he made there was that by changing the allocations in the portfolio, you can improve its safe withdrawal rate.

Mostly Voices [5:05]

That is the straight stuff, O Funkmaster.

Mostly Uncle Frank [5:09]

Specifically, he referenced the fact that if you tilted the portfolio to more small cap and small cap value stocks, you would also increase Benge's original safe withdrawal rate to about 4.5%.

Mostly Voices [5:21]

Yeah, baby, yeah!

Mostly Uncle Frank [5:25]

I think the more important admission there is just the admission that changing the allocations in a portfolio does change the safe withdrawal rate. and if you can change it by just changing the stock allocation, there should be no reason that you can't change other allocations or other asset classes in the portfolio to get yourself a better projected safe withdrawal rate, which is one of the goals of what we're trying to do here. Fear, that's the other guy's problem. But this does beg a couple of questions. The first one is, is if we all accept that the retirement spending smile, blanchet, projection of inflation is the more valid one, and by changing the allocations in portfolios we can raise the safe withdrawal rate by half a percent or more, then why aren't people incorporating those assumptions into their projections? Just about all the things that Kevin listed last time were people that have not incorporated these assumptions into their projections.

Mostly Voices [6:32]

It's a disgrace to you, me, and the entire gym state.

Mostly Uncle Frank [6:37]

And you have to ask yourself, why haven't they done that? Are they just intellectually lazy? Are they trying to sound more pessimistic to sound more popular and get more clicks and more attention? Are they trying to sound smarter by being more pessimistic when they're just being wrong? Or do they have conflicts of interest or all three of those conditions? Which leads to the second big question here. That is, if we recognize that by changing the allocations in a portfolio we can improve its projected safe withdrawal rates, why aren't more people trying to do this? Why are those people that you referenced, Kevin, in that email last time, not trying to do this? Why are people relying on portfolios that are 10, 15, 20 years old as their basis? That's not an improvement.

Mostly Mary [7:33]

And pretending those have the best projected safe withdrawal rates

Mostly Uncle Frank [7:37]

even though they haven't done the calculations. I mean, isn't it time for people who put these calculations forth to up their game and do their jobs? and tell us what's the best thing to do and not how bad things might be if we do something that's sub-optimal. My invitation to you is that if you do get a chance to ask any of these people about their safe withdrawal rate projections, you should ask them whether they've incorporated David Blanchett's data and whether they've considered whether the portfolio is optimized for safe withdrawal rates. And if they haven't done those things, you should be asking them, why haven't you done that? Where have you been? What have you been doing for the past 10 or 15 years? You haven't been doing your job. You had only one job.

Mostly Voices [8:28]

And you have no business adopting more pessimistic assumptions without

Mostly Uncle Frank [8:33]

also adopting the more optimistic assumptions if you pretend that you've been updating Beggan's research. I says, Pigpen, this here's a rubber duck and I'm about to put the hammer down. Do all the updating or don't do it at all. Forget about it. Another point raised by Wade Pfau and his sidekick on that podcast goes to the concept that your portfolio is not going to turn into a pumpkin after 30 years and that the longer you go out, the more consistent the safe withdrawal rate is ultimately going to be. And he confirmed in this podcast that really the first 10 years of performance for the portfolio determines 80% of its longevity. So anytime you hear somebody say, well that's only going to work for 30 years, they are blowing smoke and don't really understand what they're talking about. Because if it's going to be good for 30 years, it's probably going to be good for Significantly longer than that as well, perhaps with some small modifications. But I believe that's enough on that, so let's move on.

Mostly Voices [9:43]

I says, Pink Pan, this here's a rubber dube. We just ain't gonna pay no toll. So we crashed the gate doing 98. I says, Let them truckers roll 10-4.

Mostly Uncle Frank [9:54]

And? Here I go once again with the email. First off, First off, we have two emails about the same thing.

Mostly Mary [10:02]

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

Mostly Uncle Frank [10:06]

First one is from our friend Justin over at Risk Parity Chronicles. Young America, yes sir.

Mostly Mary [10:14]

And Justin writes? Hi Frank, I just wrapped up a seven part series looking at REITs and their role in a risk parity portfolio. Don't know if you saw them, but I just wrapped them up with this post. and that has links to the previous parts if you are interested. Anyway, here is a question for the show. For me at Risk Parity Chronicles, the answer to whether REITs deserve a special place in a risk parity portfolio is clearly on the negative side. In the interest of fostering an enlightening debate, however, I'm just wondering about your views. Care to take the other side of the discussion and point out their merits that I didn't consider? Thanks, Justin.

Mostly Uncle Frank [10:56]

And our second email on the topic is from Drew, and Drew writes：hi, Uncle Frank. Short and sweet.

Mostly Mary [11:04]

What are your thoughts on the analysis of REITs, particularly the conclusion over at the Risk Parity Chronicles site? Thank you again for this excellent podcast, Drew.

Mostly Uncle Frank [11:15]

All right, very interesting topic, and I realize you guys wrote those emails before the recent revisions to the last blog posts in that series, which did change the original conclusions. But I will link to it in the show notes so you guys can check it out. I think the whole series is worth reading if you are interested in REITs in particular.

Mostly Voices [11:38]

Top drawer, really top drawer.

Mostly Uncle Frank [11:42]

And just so everybody knows what we're talking about, in the concluding article of the series, the main points were that a Portfolio of individual REITs would do better than either a REIT fund or a portfolio of individual utilities. And these portfolios all had 30% of the allocation I'm talking about. But it would not have done better as, say, a portfolio of individual small cap funds, or at least the ones that Justin chose for that exercise. Now here at Risk Parity Radio, we've been talking about REITs as a potential allocation since episodes 19 and 21, which you may want to go back and listen to, and most recently talked about it in episode 203. But you can search all of the podcasts at the website if you like to find all the episodes about REITs. My basic conclusions on REITs have not changed, which is that they are kind of an optional item to include in a risk parity style portfolio. if you do include them, I wouldn't probably devote more than 5 to 10% of the portfolio to them, and they should be considered along with the stock portion of a portfolio in terms of its overall macro allocations. So I would not have used a 30% allocation to REITs or alternative to REITs, as Justin did in the exercise in his last blog post, but I realized that was for illustration to magnify the effect. I also agree that choosing individual REITs is a much better practice than using one of the REIT funds. And this is because REITs are kind of a peculiar asset class or sector, I should say, because they're not actually organized around a type of real estate investment, but around the structure of a real estate investment trust itself. And so an individual REIT might contain a traditional real estate investment, say office buildings or residential, but it can also involve many esoteric businesses including timber, billboards, cell towers, personal storage facilities, data centers, and other things of that nature. And when you look inside one of these REIT funds like VNQ, you will see that it's actually not very well diversified because some of the largest REITs happen to be things like cell towers and are then overrepresented in the fund. So that's why I think the better practice is if you're going to go with the REIT route is to Choose individual REITs, look for the largest or nearly largest in their individual categories of what kind of businesses they actually are, but then don't have more than one of them for each category. I talked about the eight we hold back in episode 203, I think, the individual ones. We also hold Warehouser, WY, which is timber that I forgot to mention there. But that would give you a sense of how you might do that, if you are so inclined. Because I don't think anybody should feel like they have to have REITs in their portfolio. If I was forced to choose only one REIT to hold, I would hold O Realty Income Corp, which holds the leases on about 11,000 or 12,000 convenience stores and pharmacies and the like. PSA, public storage, is also a nice one to hold if you're only going to hold a few. The one kind of REIT I would avoid holding would be ones that invest in mortgages, because they are more like financial companies than lease holding or land holding businesses. And so they are generally very volatile and often highly correlated with the stock market. And finally, the other thing I have to say about them is that they are best held in a tax protected account, an IRA or a 401k, because they do throw off ordinary income for the most part. But enough on REITs and thank you for those emails. Second off. Second off, we have an email from Jim and Jim writes.

Mostly Mary [16:18]

Hi Frank, which podcast do you seek about smart beta portfolios? Thank you, Jim.

Mostly Uncle Frank [16:26]

All right, Jim. Jim, this is a big ship. I'm just a country doctor. First, generally, the term smart beta is something I try not to use because it's been misused and overused as some kind of marketing device for many fund managers. And it's used very inconsistently in that kind of usage. What I believe you are referring to is more accurately referred to as factor investing, as in the Fama French three factor model or five factor model. Some people also call these styles like Morningstar. I really don't know why they do that. I think that's a very confusing labeling. We're not talking about fashion design here. I'm talking about the central nervous system. But sir, I am a scientist, not a philosopher. But I think the best podcast source for learning about factor investing or smart beta if you want to call it that is the Rational Reminder podcast with Ben Felix. There's a couple nice videos there on YouTube. Five Factor Investing with ETFs is one of them. Expected Returns and Factor Investing is another one. I will link to a couple of those in the show notes, but I would just go to their channel, search Factor Investing, and you'll find many, many videos there about this topic that will be very enlightening. because they take it all the way from the baseline academic research to the applications with specific ETFs. Bear in mind, however, they are Canadian, so some of those ETFs might look unfamiliar, even though the contents of them is the same as some of their US counterparts. Another YouTube channel I would recommend is the one put out by Resolve Asset Management, who focuses more on risk parity Broadly and factor investing within that. So I would also check those out too and subscribe to both of them. I think they have podcast versions in addition to the YouTube video versions. At least I know that Rational Reminder has podcasts as well as what you find on YouTube. So hopefully that helps and thank you for that email. By golly, Jim, I'm beginning to think I can cure a rainy day. Last off.

Mostly Mary [19:03]

Last off, we have an email from Chris, and Chris writes, Frank, I have been listening to the show for approximately six months now and have thoroughly enjoyed it. Groovy, baby. Great work, and I love the audio nuggets. Somewhere in the near future, you've got to work in some charge it to the underhills from Fletch.

Mostly Voices [19:18]

So, you know, my kidneys feel a lot better in this position. Maybe it's just that I'm not doing any calisthenics. You know, if I did some sit-ups in the morning or bent over like this, I'd probably feel 100% better. Moon River. Thank you, Doc. You ever serve time? Breathe easy.

Mostly Mary [19:34]

Breathe easy. I have been scouring intently for late accumulation phase, Kitsis would describe as late growth stage, questions in your podcast and transitioning to a risk parity style portfolio in decumulation. I am currently a three fund Boglehead with a slight SCV tilt and want to start my transition to a more risk averse style portfolio as I am approximately 10 to 12 years from retirement financial independence. I am actively using portfolio charts, thank you Tyler, and am attempting to maximize my remaining growth in these last years along with decreasing risk. by removing international, adding more cowbell, REITs, long-term treasuries, gold, etc. I currently have 14x savings. On to my questions. How far out from retirement slash financial independence is too far to begin adapting to your final risk parity style portfolio? I know you've mentioned Bill Bernstein's won the game several times, but what if you're tracking your game winning too close to your retirement date? What is the easiest way to get into a gold ETF through a retirement vessel? I have traditional IRAs slash Roth IRAs through Vanguard, and my employer 401 offering is lacking. Right now, M1 is one of the only opportunities I can find. Looking for some sage-like direction. Thank you for all your hard work. We're listening, Chris.

Mostly Uncle Frank [21:07]

All right, a potpourri of questions. Looks like I picked the wrong week to quit amphetamines. I feel like Mr. Fixit or the Mike Myers character of the middle-aged man. Maybe I can help.

Mostly Voices [21:22]

Always hook positive to positive. When the dead car starts, remove the cables immediately. You know, you ought to put some baking soda on those battery terminals. That way they won't corrode. Why? I never would have thought of that. I mean, how do you know this stuff? I know because I'm middle-aged man. I think I need to call up a drinking buddy. Who's this? Oh, this is my sidekick, drinking buddy. Whoa, whoa, whoa, what's the difference between you and drinking buddy? I have a life.

Mostly Uncle Frank [22:03]

But your first question is, when do you need to transition? You've got 14x in savings. I assume you are targeting 25x. And you have 10 to 12 years from retirement.

Mostly Voices [22:15]

You are correct, sir, yes.

Mostly Uncle Frank [22:19]

All right, you always want to do your back of the envelope math first, which is using the rule of 72. And if you were to assume that the Stock market returns were just 8%, which is lower than the ordinary nominal return of the stock market. You divide that into 72, and whatever you have, you would guesstimate that it will double within nine years. Which in your case means that if you did nothing in terms of adding any more investments and just left your 14x alone, it would be most likely to get you to 25x somewhere between six and nine years hence. So there's a couple different ways of looking this as to when to make the transition. Nothing is going to be that exact simply because you're dealing with a land of uncertainty. But I think once you get to 18 to 20x, that may be a time to begin your transitioning, particularly if you're doing it as a slow transition where you're more just adding to things you don't have yet for the most part. Time wise, I think you need to be thinking that once you're five to seven years out from retirement that that may be also a good time to look at the transitioning. Because ideally in those last few years there you've already pretty much done all of your transitioning except for perhaps beefing up some cash or some short-term bonds or something like that and that your contributions are still going into this retirement style portfolio so that you really don't have to be making any major changes right when you retire. Everything is already there and working for you, if you will. So in your case, I would say keep plugging away here for the next two or three years and then look up and see where you are. And maybe that'll be time to start making a transition or maybe you need to wait a couple more years. This is not an exact science and fortunately it does not need to be one. Cool. And just one other thought on this is that we are in a downturn or trough right now, and we're not sure how long that's going to go on. But another point of consideration as to making a transition would also be when the market has recovered, because the best time to make transitions in your portfolio is always when your portfolio is at or near an all-time high, to effectively to the extent you're selling things, you're selling them high. So that may be another point of consideration to think about, at least right now. All right, and the easier second question is, what is the easiest way to get a gold ETF through a retirement vessel? I have traditional and Roth IRAs through Vanguard and my Employer 401k offering is lacking? Well, the easiest way is to simply open up the brokerage side of things over at Vanguard. They still have this weird structure over there where, to my understanding, you can be in mutual fund land where you can only buy Vanguard mutual funds, or you can open up the regular brokerage side of services and invest in basically anything you want. as far as stocks and ETFs are concerned. It's kind of like going from the kiddie pool to the big kids pool, or open water swimming. So see if you can do that, and that would solve your problem and allow you to invest in gold ETFs there directly. But if, for whatever reason, Vanguard won't let you do this, I think it's time to probably leave Vanguard. That's really not acceptable in the 2020s. to not being allowing customers to invest in essentially whatever they want on stock exchanges in a traditional IRA or Roth IRA. It's just not acceptable.

Mostly Voices [26:14]

Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys?

Mostly Uncle Frank [26:18]

And so you would go to Fidelity or Schwab and they would be happy to take on your IRAs, I assure you. Just go there. Open up whatever you need and initiate the transfer from the receiving brokerage. But as individual investors in the 2020s, we really should not be putting up with these kinds of nonsensical restrictions on what we can use or invest our own money in.

Mostly Voices [26:43]

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

Mostly Uncle Frank [26:47]

I suppose you could also use M1, but the one issue I see with using M1 and their PI system is that unless you have all of your stuff there, you're still going to be needing to do some kind of calculation as to what's in those accounts and what's in some other accounts in other places. So the PI system may just be adding an additional complication instead of saving you work. But hopefully that helps and thank you for that email. Charge it to the underhill, senor. Yeah, that's right. But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frank@riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com and put your 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, follow, give me a review. That would be great. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Voices [28:04]

Little H Man.

Mostly Mary [28:42]

He has powers and knowledge that are far beyond younger men middle-aged man caught between 40 and 55, accruing more interest yet losing his sex drive developing skills and a gut middle-aged man 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.