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 [0:36]

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 [1:10]

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

Mostly Uncle Frank [1:14]

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

Mostly Voices [1:25]

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

Mostly Uncle Frank [1:29]

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

Mostly Voices [1:33]

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

Mostly Uncle Frank [1:37]

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 [2:36]

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

Mostly Uncle Frank [2:44]

But whomever you are, you are welcome here.

Mostly Voices [2:48]

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

Mostly Uncle Frank [2:52]

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

Mostly Voices [3:14]

But now onward to episode 212.

Mostly Uncle Frank [3:19]

Today on Risk Parity Radio, we're just going to keep hacking away at our backlog of emails. We're still in August, only six or seven weeks behind here.

Mostly Voices [3:31]

I'd say in a given week, I probably only do about 15 minutes of real, actual work.

Mostly Uncle Frank [3:38]

And we have a little potpourri of topics here today.

Mostly Voices [3:42]

Don't be saucy with me Bernaise. So without further ado, here I go once again with the email. And?

Mostly Uncle Frank [3:50]

First off, first off we have an email from Sue. So sue me.

Mostly Voices [3:58]

No, don't sue me. That's the opposite of the point that I am trying to make.

Mostly Mary [4:05]

And Sue writes, We are retired and we just purchased our third property. It will serve as a rental for our disabled daughter and her friend. That way we can adjust the rent to what works for them. Now our financial advisor is suggesting that we put all properties into a revocable trust. What are your thoughts on this?

Mostly Uncle Frank [4:25]

Looks like somebody wants me to take off my Economist and engineer hats and put on my legal hat for a little while here. Saul Goodman, please sit. I must caution you that this should not be considered legal advice, but merely information and hopefully a little bit of education about revocable trusts. And we will start with the bad and ugly approaches to this topic. which are often driven by the denizens of the financial services industry. Ned Ryerson! And their drinking buddies in the financial media. What's the difference between you and drinking buddy?

Mostly Voices [5:18]

I have a life!

Mostly Uncle Frank [5:22]

Many of you have probably heard some of these kinds of pitches from these marketing outlets. who also have their free steak dinners and hotel conferences about, well, everybody needs a trust. Bing! And everybody needs this corporate structure.

Mostly Voices [5:38]

Bing again!

Mostly Uncle Frank [5:42]

And it's gonna solve all your tax problems and your liability problems and any other problem that'll ever arise.

Mostly Voices [5:45]

That's my little for laying chops and dice and slices, never stops, lasts a lifetime, mows your lawn, and it mows your lawn and it picks up the kids from school, it gets rid of unwanted facial hair, it gets rid of embarrassing age spots, And then they try to sell some kind of package of stuff that may or may not be appropriate for you. Am I right or am I right or am I right? Right, right, right.

Mostly Uncle Frank [6:09]

But this is the common approach for people that sell packages like this or insurance products or anything that is commission based essentially.

Mostly Voices [6:20]

Always be closing.

Mostly Uncle Frank [6:24]

They basically have this product and then they try to convince you about all the wonderful things the product can do.

Mostly Voices [6:32]

How do we do it? How do we do it? Volume, volume, turn up the volume.

Mostly Uncle Frank [6:40]

Whether you really need the product or have those things done for you or not, they try to convince you that you are one of those people who could benefit from this product.

Mostly Voices [6:47]

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

Mostly Uncle Frank [6:54]

and of course, this is completely backwards. What you should be doing is figuring out, well, what am I trying to accomplish here? What is my purpose? And then go and look at the types of products that are available or structures that might be available that will fulfill that purpose. So let's do it that way. Let's do it the right way, which is look at the purposes first and then look at the products or corporate structures or things that might serve those purposes. The three basic purposes of putting things in trusts or corporations or other things like that are avoiding probate, privacy, and liability protection. Now, that first purpose, avoiding probate, let's talk about why you would want to avoid probate. The probate system can take a long time. It can cost a lot of money. This is basically if you die without putting your thing in a trust or having some arrangements like that. And so in particular, if the eventual heirs need to access that asset earlier, and you know that's going to happen and you're trying to make things easier for everybody, oftentimes the easiest way to do that is to put particular assets in a trust or structure your estate planning documents so that things are transferred into the trust upon death.

Mostly Voices [8:14]

Never go in against a Sicilian when death is on the line.

Mostly Uncle Frank [8:18]

Which you can do with lots of accounts simply by filling out a instruction or beneficiary form. And that goes for bank accounts and investment accounts and other accounts. But trusts can do all sorts of things and they come in all sorts of flavors which we'll not be going into here. Not gonna do it. Wouldn't be prudent at this juncture. at least not in any detail. So you might have a trust that is simply there to avoid probate and it's a simple thing that will be dissipated in a relatively short period of time. Or it may be maintained for some period of time for miners or other people that you do not want to have accessing the asset or the whole asset all at once. It also may be a mechanism for keeping certain assets out of the hands of certain spouses of children or other people that you do not want to have access to the corpus of a trust. Or it could be set up to provide somebody an income for life or even to create some kind of foundation that is also donating money for life or in perpetuity now with some trusts to some cause or family need, say a trust that is supposed to fund future heirs education could be set up. But if you are using it for these kinds of purposes that would ordinarily be taken care of by a will or at least in part by a will, this all needs to be coordinated with those estate documents as well. whatever wills, trusts, and other instructions all need to work together in a package that is specifically designed for you, particularly if you have multiple properties, lots of accounts, and other complex things. So that you don't go to your financial advisor to get that kind of thing set up for you. You should go to a local trust and estates attorney who is a specialist in the area. And it's going to be a lot cheaper than probably having some financial advisor doing it. And you'll have a lot more confidence in it. So in your case, you might just ask some financial advisor for some recommendations or talk to some of your friends to get some recommendations about a good trust and estates attorney and then sit down with them and see whether this is what you need and then how it needs to be structured. Because there's also a question of when you put the asset into the trust. and whether it needs to go in there now before you're dying or it can go in upon death. It sounds like the critical question in your situation is suppose you do put the property in this trust for your disabled daughter, then who is going to manage this trust when you're not there? And the selection of that person or entity is generally a whole lot more important than the structure itself. But that also needs to be talked through with a competent trust and estates lawyer. So I can see that a revocable trust would be a useful entity for a lot of purposes that you might have, but it needs to be set up properly. It needs to focus on the exact purpose that you have for this trust. And you don't just create trusts and throw assets into them. willy-nilly without having the whole thing planned or thought out. All right, let's go to these other two purposes that people sometimes say trusts are good for dealing with, but they're probably not the right tool for the job. First one is privacy. Obviously, if you have your names on public records like deeds and things like that, people can look that up and know you own that property. And so I suppose you could use a trust for that purpose, although oftentimes the names of the trusts give the details away in their name if they're somebody's family trust. But if you really wanted more privacy here, the best vehicles for that are going to be limited liability corporations probably working with trusts or a set of trusts. These days there are several states that kind of specialize in letting people come in there and do this. South Dakota is the most prominent one in this area. If you go to Rapid City, there's all kinds of trust companies all over the place. Wyoming is getting into this mix. I know Nevada is into this mix. This is for people that have very large estates generally who can afford to be spending a lot of money on setting these kinds of corporate entities up. I've looked at these things just to know that of their existence. But they're generally not appropriate for most people just because of the size of the effort and expense that would be required to do such a thing. But when you do reach your $100 million estate and want to create a trust that essentially operates in perpetuity, you can set up something called a dynasty trust in many states now. That will get around what used to be called the old-fashioned rule against perpetuities by creating a statute that allows for trust that will last hundreds of years. But now if you were talking just about property management and best practices there and you have several properties or a bunch of properties and perhaps additional investors or other things, limited liability corporations are actually set up to deal with those sorts of issues where you manage a set of property through one or more LLCs that are connected. But that doesn't sound like your situation actually at all. So I'm not sure that would be of any real use to you. Now the third purpose that is often touted for creating trusts or LLCs or other entities to put personal assets into or other assets into is liability. And it always sounds like these promoters are saying, well, put it into this entity and then nobody can find you and know who to sue. That's probably valid on its surface, but most competent lawyers and investigators who really want to sue you and find you can go through layers of these things in most cases, and they will find you eventually, even if it's just suing the entity on top and then going through discovery in a lawsuit and then adding the other defendants later. If your issue is really liability, the first tool you should probably be thinking about using is just liability insurance and umbrella insurance depending on the situation. Because that is going to be a less expensive and more effective way of dealing with liability or potential liabilities. Than creating all these sorts of entities and trying to hide from potential creditors or claimants. Forget about it. I think you should go talk to a competent trust and estates lawyer in your local jurisdiction. Because this may be a good idea. But I think the real question for you is how do you want the property to be handled when you're no longer around? because that needs to be built into whatever trust or other structure that you create here. Just one other thing. Sometimes people think that forming a revocable trust is going to change the tax status of something. That's generally not true. These kinds of trusts are generally just passed through entities. So you'll need some reporting, but it's not going to change your tax situation. If you start forming multiple member LLCs, then you may have to issue K-1s and do other things like that. But that's another reason not to go running off trading these things willy-nilly before you understand the full implications of what you're doing. So usually the procedure to follow is go talk to the trust and estates lawyers about what you're trying to do and what structure you might need. Then go talk to a tax professional about how that would affect your taxes, if at all. And then go tell your financial advisor what you've done. But ordinarily they should not be the ones doing it. They're not the right people for that kind of job.

Mostly Voices [16:51]

You know, I got friends of mine who live and die by the actuarial tables and I say, Hey, it's all one big crapshoot, anywho.

Mostly Uncle Frank [17:02]

But I think I've carried on long enough about this topic, which is a little far afield from what we usually talk about here. You are talking about the nonsensical ravings of a lunatic mind. And thank you for that email. Second off. Second off, we have an email from Vern.

Mostly Voices [17:20]

Hey Verns, I just love these outer space movies, don't you? This is my all-time favorite one too. This is called Attack of the Moon People. And this is where the evil Vendor sends his atomic virus space pod to Earth to paralyze everybody so him and his evil buddies can just waltz in big as you please and stomp the living daylights out of everybody. And Vern writes, hi Frank, love the podcast.

Mostly Mary [17:42]

Thank you for sharing all of your wisdom and insight. I would like to run something by you and make sure my thinking is correct and I am on the right path for an early retirement. If I follow your withdrawal strategy laid out in episode 68, does it make sense to keep all of my equities, roughly 60% equity allocation, in my taxable account and then sell these equities to live off, no matter if they are up or down. My thought process is if equities are down, I would then rebuy them that day in my traditional IRA account by selling Treasuries or gold, whichever one is up, and rebuy the equities I had just sold in my taxable account. If equities were up, then the annual withdrawal may be enough to mostly realign my equity allocation. My plan is to withdraw 5% of my portfolio annually and at that time rebalance the portfolio as well. Is my thinking correct with this withdrawal approach? An added benefit, if this approach is acceptable, could also be tax loss harvesting in the taxable account when equities are down without having to actually sell the equities in aggregate since they will be rebought that day in the traditional IRA account. Thoughts? Thank you again for all you do, Vern.

Mostly Uncle Frank [19:08]

Well, Vern, yeah, I think your basic plan here should work fine. This is the same kind of plan that Paul Merriman uses for their personal retirement portfolio, which is this. They look at what they've got at the beginning of the year, they take 5% of that, sell it in a rebalancing operation, Put that 5% in a short-term bond fund and then use that money for the year. Yes. So that's basically a good plan. And you've also made an observation that sometimes people do not fully appreciate and they get a little bit overly concerned about what assets are in their taxable account versus what assets are in their IRAs or other accounts. which is if the thing you want to sell to use that year is in the IRA, but you really don't want to take the money out of the IRA and incur a tax bill on that, how do you manage that situation? And it's not that hard. What you do is you sell, say, the stock asset. Let's pretend that all the stocks that you have are in this taxable brokerage account and you don't have any other kinds of assets in there. You can still sell that asset. But then you need to go into your IRA, sell the asset that you wanted to sell and more of it, and then rebuy some stocks in the IRA to get back to the overall allocation that you wanted to have. You do need to make sure that you are obeying things like tax loss harvesting rules, so you don't run afoul of those if your sales in the taxable account result in losses. You don't want to get a wash sale by buying that exact same thing in the IRA within 30 days. But I think what you've described in your email is what I'm talking about here as well, that there's a very easy way to handle rebalancing in these situations, even if the asset that you want to sell to live on is in the IRA and not in your taxable brokerage account. In terms of the mechanics of some of this, yes, you may want to set it up so you're actually doing these operations later in the calendar year, because at that point in time you'll have a better idea as to what your overall income is going to be for the year and how to do some tax loss harvesting there, or whether you also want to be doing IRA conversions to Roth IRAs. in some of the same kinds of moves. So it is kind of a thing that you often focus on in November and December of each calendar year that you're managing a portfolio. Never show any sign of weakness. Always go for the throat. Buy low, sell high. Fear, that's the other guy's problem. And if you're looking for other episodes about this, I think you've identified episode 68, where we were going through Chuck's situation. And his withdrawal strategy plans. You might also want to check out episodes 160 and 163 where we were going through the same exercise with Karen. Karen, how much were they worth? They weren't everything. That's all the money that we had, Karen. I was dependent on that. Why did you do that? And we also talked there about really managing your withdrawals to your expenses so that if you were not in fact going to spend 5% of your portfolio in a particular year. You don't need or want to pull that out all at once necessarily. And the way I generally think about it is that 3% or up to 3% of your portfolio can be spent on your keep the lights on kind of expenses of your everyday life. Another 1% goes for comfort expenses, having people do things like cut your lawn and clean your house and personal trainers and those sorts of things. And then another 1% for what you would call extravagances, special things that you're not likely to incur every year and that are likely to change from year to year, big family trips and those sorts of things.

Mostly Voices [23:22]

But it sounds like you have all of this in hand, Vern? Vern, oh no, it's Bend or's moon pod. Oh no. We're going to be paralyzed and Vendor's going to come in here and stomp the living daylights out of us.

Mostly Uncle Frank [23:33]

And I'm glad this is helpful and thank you for your email.

Mostly Voices [23:37]

Last off.

Mostly Uncle Frank [23:41]

Last off, we have an email from Renee and Renee writes.

Mostly Mary [23:46]

Hi, Frank, love your podcast. I'm at Financial Independence and currently holding 20% of my portfolio in the small cap 600 ETF IJR. It's not exactly small cap value, but using the website etfrc.com, I could verify that there's a 70% overlap between IJR and VIOLV. So question, is the juice of VIOLV lemon worth the squeeze when compared with IJR? Especially considering the tax implication it would be to move from IJR to VIoV in my taxable account. Thanks.

Mostly Uncle Frank [24:38]

All right, first just to orient everyone here, we're talking about small cap funds and small cap value funds. iShares actually has this set of three funds there. that are all tied to the S&P 600 small cap index. And those are IJR, which is the whole index, IJS, which is the small cap value in IJT, which is small cap growth. Now the fund VIOV is just a Vanguard clone of IJS. And Vanguard created that clone I think somewhere around 2017 because they realized that their standard ETF VBR was not as popular. It's based on a different index and that IJS and VIoV are smaller and more valuey than VBR. I should have quit you, baby. so my basic answer is yes, you are better off with the small cap value than the straight small cap. It has less to do with the relative performance and more to do with the lower correlation that you are getting with a small cap value fund. Because remember, the main reason that you're holding this is not because you think it's going to necessarily perform better than the market, but because it's the most diversified, easy fund that you can hold from your large cap growth or S&P 500 or total market funds. It's basically in the other corner of those Morningstar style boxes.

Mostly Voices [26:32]

Sleep me baby, till the juice runs down my leg.

Mostly Uncle Frank [26:43]

so a combination of one of those large cap Focus funds and small cap value is the easiest way to diversify across the whole market without having to hold lots and lots of different funds.

Mostly Voices [26:58]

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

Mostly Uncle Frank [27:02]

All that being said, you are correct that there is a large overlap between IJR and VIoV or IJS if you prefer. So you wouldn't want to incur lots of tax liability to make this switch. But if you're not incurring tax liability to make this kind of switch, I would just go ahead and do it. And I would also not buy any more of IJR, but instead, if you are buying small cap value, go ahead and buy VIoV or IJS. in the future. It's okay to have more than one thing in one area, even though it might look a little messy. That's what I'm talking about. I think the other observation is that usually in a retirement style portfolio, the area that you do not want to have or at least want to have is the small cap growth, which is really the most speculative area of these sorts of things and most volatile. And by switching out of IJR to a strictly small cap value fund, you are getting rid of that piece that you probably don't want to be holding for the most part anyway, at least not in retirement. It's not going to matter that much in an accumulation portfolio. And that is an example of an idea popularized by Nassim Taleb called via negativa that oftentimes the best questions you should be asking in life are not what I should do or adopt or try next, but what should I be getting rid of?

Mostly Voices [28:36]

I don't like my job and I don't think I'm going to go anymore.

Mostly Uncle Frank [28:44]

Because if you can get rid of things that aren't really helping you or serving you, you can put in other things into that space that will help you or serve you a lot better. Yeah, baby, yeah!

Mostly Voices [28:55]

And that's not just investing, but in all aspects of life.

Mostly Uncle Frank [29:00]

Of course, there is also a timing factor as to when you might want to quit something.

Mostly Voices [29:06]

Looks like I picked the wrong week to quit smoking. Looks like I picked the wrong week to quit drinking. Looks like I picked the wrong week to quit amphetamines. Looks like I picked the wrong week to quit sniffing glue.

Mostly Uncle Frank [29:18]

Hopefully that all helps Renee and thank you for that email. 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@riskparriyradio.com or you can go to the website www.riskparriyradio.com and put your message into the contact form there and I'll get it that way. Hopefully we will be finishing off the emails from August in the next episode or two. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, give me some stars, a review. That would be great.

Mostly Voices [30:12]

Okay. Thank you once again for tuning in.

Mostly Uncle Frank [30:15]

This is Frank Vasquez with Risk Parity Radio signing off. Laughing time is over.

Mostly Voices [30:23]

Meeting adjourned. He certainly broke up that meeting. Right now I'm thinking about holding another meeting in bed.

Mostly Mary [30:32]

Oh, McBane. 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.