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. Thank you, Mary, and welcome to Risk Parity Radio.

Mostly Uncle Frank [0:46]

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.

Mostly Voices [0:53]

Expect the unexpected. It's a relatively small place.

Mostly Uncle Frank [0:57]

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. I don't think I'd like another job. 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 [1:28]

There are basically two kinds of people that like to hang out in this little dive bar. You see in this world there's two kinds of people my friend. 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.

Mostly Voices [1:52]

Abby someone. Abby who? Abby normal. Abby normal.

Mostly Uncle Frank [2:01]

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.

Mostly Voices [2:16]

The best Jerry, the best.

Mostly Uncle Frank [2:20]

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. 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 [2:51]

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. But now onward to episode 219. Today on Risk Parity Radio, I think we're just going to do what we do best here, albeit slowly, and continue to see whether we can finish most of September's emails. Surely you can't be serious. I am serious. And don't call me Shirley. But before we get to that, Just a small promotional note. We are getting ready here to have the hordes descend upon us again for Thanksgiving. I think we're gonna have slightly less than 20 people this year, so not too taxing. Dogs and cats living together, Mass hysteria! But I am reminded that Giving Tuesday is coming up next Tuesday, and that while this podcast has no sponsors, it does have a charity. and that charity is the Father McKenna Center, which serves homeless and hungry people in Washington, DC, and is linked to on our support page. If you have thought about giving for Giving Tuesday, but haven't decided who to give to, I would appreciate it if you would consider the Father McKenna Center. What may appeal to this audience is that it is a highly efficient use of funds The best Jerry, the best. Because the space and infrastructure for the center are in fact provided by the high school that it is attached to and on their property, which means a very high proportion of the donations can be spent on the mission of the center and not on rent and utilities. But the center runs a hypothermia program to help homeless people in the cold over the winter time. And so now is a good time for charitable donations because they are always needed. So check out the links in the show notes and thank you for your support. And another programming note and resource. In episode 217, we talked about listener Craig's question about asset swaps and wash sales.

Mostly Voices [5:33]

Our co-creator over at Risk Parity Chronicles, who is our listener Justin, has created a couple nice videos over there, little tutorials,

Mostly Uncle Frank [5:38]

as to how to do that. And they're very timely and I thank him for it. Yes! This is to help you with asset management of multiple accounts, some which are retirement accounts, some which are taxable accounts. as you draw down in your portfolios. And I will link to those in the show notes as well, so you can check them out. But now without further ado... Here I go once again with the email. And... First off, first off we have an email from Uday. Control.

Mostly Mary [6:15]

Control, Uday. And Uday writes... Hi Frank, I enjoy your podcast and I love the education you offer to us DIY investors. I have listened to approximately 75 of your episodes and if my question below is already covered, I would appreciate it if you could point me to the appropriate episode in the library. I am eight years from retirement and I have been exploring buffered ETFs as a strategy in a diversified portfolio. with the thought of being able to maintain a safe withdrawal even in a year like 2022. The literature states funds like BSEEP or US EEP limit the upside of the market but offer protection on the downside through buying puts. Sounds too good to be true. What am I missing? Thank you again for your research and podcast, Ure K.

Mostly Uncle Frank [7:06]

Well, that literature you're reading sounds more like marketing materials than Good information about these kinds of products.

Mostly Voices [7:15]

Always be closing.

Mostly Uncle Frank [7:19]

And I would put this in the category of structured products, which are buffered funds and some of these annuities that have these bells and whistles with floors and things like that and other things that attempt to use options to reduce the volatility of a stock market portfolio all wrapped up in one package. The problem with these things is they really defeat the purpose of holding the stocks in the first place. The reason you are holding stocks in your portfolio is due to their higher reward characteristics because you know that over time they will drive higher returns than most other asset classes. Now, the caveat to holding stocks is that they have short term volatility, and by short term, I'm talking 5-10 years in this instance, 1 to 10 years, really. And so lots of purveyors of financial products have seized upon this phenomenon and said, all right, well, we'll take a stock fund and then we'll wrap it in this thing that reduces the volatility, and isn't that a great thing for you? The problem is it also reduces the returns commensurate with reducing the volatility and then sucks out a big fee for the quote, privilege, unquote. So you're really not getting anywhere in the end in terms of portfolio construction. The simplest way to see this is to take something like BSCP, which I've put into Portfolio Visualizer, and compare that to something that is just The underlying stock component in that case, the S&P 500, and a allocation of cash. And so if you do that, you see that you could get the same performance as BSCP simply by holding about 62% in a total stock market fund or S&P 500 fund and the remainder in cash. And I will link to that analysis in the show notes so you can see it. But what that's telling you is that the easier and better solution and more efficient solution is simply to hold less of that stock thing, free up more space in your portfolio, and then use that extra space to put other things in there. It's not to buy one of these buffered products or other structured products. That's not an improvement. All you are doing when you were doing that is reducing the overall returns of your portfolio. and creating a management mess in terms of allocations to other things in your portfolio. In a lot of ways, this violates what we call the simplicity principle here, which is to keep your portfolio simple and relatively easy to understand and manage. By taking these products that have multiple things inside of them and bells and whistles, you are making things much more complicated and much more difficult for you to manage and understand and to model because you really don't know how this thing will perform in the future. And this goes for just about anything that represents itself to be all inclusive or a fund of funds or a Swiss Army knife of things. Lots of things are sold or marketed this way, and you should recognize that anytime somebody is marketing to you something that they say has multiple features in it, that's probably not something you want. What you actually want are the raw ingredients for each of the asset classes presented to you in an efficient form, hopefully an ETF, that you can then mix and match and create your own portfolio. And that will be the most efficient way and best way for you to construct your portfolio and then being able to manage your portfolio in the future. More complicated is not better. Forget about it. And that goes for not only things like this, but also various insurance products, target date funds, the stuff they offer at robo advisor land. All of that stuff essentially violates the simplicity principle, and you ought not to use it unless you have to. Occasionally it is the best choice. But it's usually not. But I will link to that portfolio visualizer analysis in the show notes so you can check it out and thank you for that email. Second off, we have an email from Rick and Rick writes, hi Frank, Gold. You seem to love it.

Mostly Mary [12:11]

However, lately, it is proving to be a waste of space in a portfolio. It had only one job, and it's not doing it. Isn't it part of the foolish consistency thing you advocate against to keep adding this useless asset class in our portfolios? Yeah, sure, it helped in the past, but in this day and age, shouldn't we update our concepts?

Mostly Uncle Frank [12:32]

Well, it sounds like somebody here has a case of the Mondays.

Mostly Voices [12:37]

I gotta get out of here. I think I'm gonna lose it. Uh-oh. Sounds like somebody's got a case of the Mondays.

Mostly Uncle Frank [12:44]

At least that's what we used to call it when I was back in the working world.

Mostly Voices [12:48]

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

Mostly Uncle Frank [12:59]

But let me just take you aside, my good man, because you're Assertions do not appear to be well founded.

Mostly Voices [13:09]

This is gold, Mr. Barton. First you say gold has only one job and it's not doing it.

Mostly Uncle Frank [13:17]

Well, I think you may misunderstand what gold's job is in a portfolio, which is simply to be an uncorrelated asset that helps you reduce the overall volatility of the portfolio and smooth out the returns. And it's probably doing a better job of that this year than in many other years, simply because both stocks and bonds are down substantially this year, somewhere between 10% and 30%, depending on what you're looking at for most of the funds. By contrast, gold was up at the beginning of the year and could have been used to harvest your withdrawals, and we did that in our sample portfolios. and at this point of the year, it's down about 5%. So it's really having a flat year, which means that any portfolio that was otherwise composed of stocks and bonds that has some gold in it is going to do better and be less volatile than a simple stock bond mix. It's kind of funny because where people usually complain about gold is in years like 2021, when most of the other asset classes were doing really well and gold was kind of just lagging and laying around there. So that assertion you made is plainly false.

Mostly Voices [14:33]

Are you stupid or something? Honestly, as stupid as a stupid does.

Mostly Uncle Frank [14:41]

What has really characterized the markets this year is the unusual circumstance where you have the Fed raising rates substantially, which affects the overall value of the US dollar and makes it go up a lot. You saw this around 1980, around the year 2000, you see it today. So the dollar has increased 15 to 20% in value versus other currencies. That has a tendency to suppress the price of gold and other assets just generally. Now if you look at gold priced in yen or euro, It's had substantial advances. It's not just flat. It's up substantially. Which is just another indication that gold is performing as it has for 400 years or more. That's why people have held it for thousands of years. And so none of that has changed. This day and age for gold is not different from other day and ages for gold. That's not how it works.

Mostly Voices [15:43]

That's not how any of this works.

Mostly Uncle Frank [15:47]

It's still just a very boring place to store some value and smooth out overall volatility in a portfolio. I do invite you to educate yourself a little more. You might go back and listen to episode 12 of this podcast where we first talked about gold in detail and then also episode 40 where we reviewed a 100 year analysis buy big earn over at early retirement now, concluding that 10 to 15% gold in an otherwise stock bond portfolio makes it perform better as far as a safe withdrawal rate is concerned. That's the fact, Jack.

Mostly Voices [16:26]

That's the fact, Jack.

Mostly Uncle Frank [16:30]

And I'll also link to a nice article from portfolio charts about thinking about gold as an ingredient in a portfolio. Not a driver of a portfolio, but something that you add sparingly, but appropriately to improve your safe withdrawal rate and overall performance.

Mostly Voices [16:50]

I think you've made your point, Goldfinger. Thank you for the demonstration.

Mostly Uncle Frank [16:53]

Hopefully those things will help you to have some greater understanding and that nothing really has changed about gold. But thank you for that email.

Mostly Voices [17:05]

The purpose of our two previous encounters is now very clear to me. I do not intend to be distracted by another. Good night, Mr. Bond. Do you expect me to talk? No, Mr. Bond, I expect you to die.

Mostly Uncle Frank [17:20]

Next off, we have an email from Anderson.

Mostly Mary [17:28]

And Anderson writes, Uncle Frank, My employer's retirement plan only offers one small cap fund, VSVIX, Victory Integrity Small Cap Value. Not to be confused with VISVX. Did they do that on purpose? It is nearly identical to VBR in asset correlation except for the glaring difference in expense ratios, 1.08%. Is it worth it to be invested in this fund to gain small cap value exposure with the sacrifice of the expense ratio? I could open an IRA just for small cap value exposures, but that sounds like work to set up and to maintain appropriate asset allocations between two funds. I have one other option. My retirement does offer VEXMX, which to my understanding is exposure to everything else in the total stock market index outside of the S&P 500. Asset correlation to VBR seems similar, and I could potentially overweight VEXMX versus my S&P 500 fund. Thoughts?

Mostly Uncle Frank [18:32]

Well, that's an interesting little quandary you have there, and I'm sorry for that ridiculous expense ratio that your 401K or 403B is foisting upon you there. I would say you ought to complain to your employer, but that's hardly a immediate solution to this issue. That and a nickel will get your hot cup a Jack Squat! First, I don't think that VEXMX, that extended market fund, is really a good substitute for a small cap value fund. And this is how you can see this or analyze this for most funds. Go to the Morningstar Fund Analyzer, and most of it is free. And so put your fund in there and then click on the portfolios thing, and you'll see how it fits in in terms of small and large and value and growth. and this particular fund is kind of between small and mid, but it's really tilted mostly towards the growth side of things. It's still in the blended category, but it's over there by the growth sector as far as funds are concerned. So you really do want to get more of that value component in there because I think most academics and others, people who study this extensively would conclude that the value factor here is actually more important than the size factor. although people debate that endlessly.

Mostly Mary [19:57]

Gttyyada,attaYadtyieyadta tta adayatta Yada,adtayada,adti,adtayta Yatta, yattaa yeta' So, just thinking about

Mostly Uncle Frank [20:06]

more practical solutions to this problem. yeah, I think the best one probably is to open the IRA and then you can just pick whatever low cost small cap value fund that you want. And you might pick VIOV in there rather than VBR, because it's more smaller and more value-y. There is also a fund called XSVM, which is small cap value plus momentum, which seems to perform like a regular small cap value fund with a small steroid boost to it. I think it has an expense ratio of about 0.25. But you might check that out as well. Now, none of these are exactly perfect solutions, but Hopefully one of them will help you achieve your goals in terms of your asset allocations here. I don't think there's anything particularly wrong with the VEXMX fund, but it's really more of a size diversifier and doesn't really do anything as far as growth and value is concerned. So maybe you take a little bit of that and then put one of these small cap values in the IRA, focusing mostly on that value component. Hopefully some of that helps and thank you for that email. Last off, we have an email from Jacques.

Mostly Voices [21:33]

Do you know how beautiful you look in the moonlight? Oh, Jacques, I'm a married woman. I know, I know. My mind says stop, but my heart and my hips cry, proceed.

Mostly Mary [21:46]

And Jacques writes：Frank, is this year showing that we shouldn't buy bond funds but only individual bonds? See, if I had individual bonds, I could hold them to maturity and I wouldn't lose a dime. However, owning ETFs of bonds, I have no control over it. Am I right in assuming that? Thanks, Jacques.

Mostly Uncle Frank [22:05]

Well, Jacques, no, your assumption is not correct, actually, because Whether you hold a bond inside of a fund or the same bond outside of a fund does not impact the performance of that bond, even though it seems like it does. It's interesting, this has actually become a popular topic, I guess, because it's towards the end of the year and bond funds have performed badly this year, and so people are running around wondering what to do with them and whether they should do bond ladders or other things that would fix the issue. But rather than reinvent the wheel, let me just read part of an article about this very topic from Ben Carlson over at A Wealth of Common Sense. And this article was published last week about bond funds versus bond ladders. And here is what Ben Carlson writes. The reason many people like holding individual bonds like this, and by like this he means a bond ladder, is because they know exactly what they are going to get and when. Even if rates move up or down in the meantime, you can wait out those fluctuations and still receive par value at maturity. After experiencing big losses in their bond funds this year, many investors are wondering if they should have been better off holding individual fixed income securities. This sounds like a good idea at first glance but does not hold up in reality. Why is this? Bond funds literally hold individual bond securities that are marked to market every day. How can a fund of individual bonds be better or worse than an individual bond that you hold? Getting your money back at maturity might be a wonderful emotional hedge, but it's not like you are any better or worse off. When rates go up, the value of all bonds goes down, whether you're holding an individual bond or a bond fund. While holding to maturity does allow you to get your principal value back at par, in an environment of higher interest rates and inflation, you will still be getting back nominal dollars that are worth less at the time of maturity. For example, let's say you own a bond fund that yields 2% and rates go up to 4%. If the duration of those bonds is five years, you would expect that fund to fall something like 10% in value. Not fun. For the sake of this example, let's say you then decided to sell your bond fund, but then buy all the individual bonds in that fund, which now collectively pay 4% and hold them to maturity. Are you better off now or not? No, you're in the exact same place either way. Now let's say you own just one 2% five-year bond, and rates go up to 4%. Sure, you do get your money back at par if you just hold till maturity now, but you're earning 2% less per year than the current market rate of 4%. So you could sell that 2% bond at a loss now to move up to one that pays 4% interest, but you're going to lose either the principal value if you sell or the income if you hold the bond that pays the lower rate. That is just how bond pricing works. There are no free lunches here. Inconceivable. And then he goes on to provide some bullet points showing the differences between holding an ETF or bond fund and holding individual bonds. And what you'll see from that is they really all relate to portfolio management. They don't relate to portfolio construction. And this does go to what we call the macro allocation principle, that all portfolios that have the same kinds of macro allocation principles are going to perform very similarly. And I think the difference that people often see with bonds versus bond funds is this illusory difference because bond funds are priced at mark to market, which means you can see the variation in the price every day, whereas individual bonds you hold, you're not pricing those at market prices every day, so you don't see the fluctuations. It doesn't mean the fluctuations aren't there. If you actually went and priced those bonds against the market, you would see fluctuations in the value of your individual bonds. And so say you constructed a 10-year bond ladder. Or maybe it goes out to 12 years. That would be the equivalent of holding three bond funds. One a short-term bond fund that's one to three, another one that's three to seven, and another one which is intermediate term bonds, which covers the 10-year. What would be the difference between those two holdings? Well, your individual bond ladder would be getting shorter and shorter every year unless you managed it otherwise. It's basically becoming more of a short-term bond fund by evolution, whereas the bond funds themselves would be managed to maintain their steady durations. So if you kept replacing the older bonds as the new ones rolled off, you would essentially be having the same structure as the three fund structure of the three bond funds. Now, what Ben Carlson is talking about, particularly in those bullet points that I'm not going to go through that you can look at is something that's kind of underappreciated. Whenever you're looking at the characteristics of a portfolio, you have to ask yourself, is this characteristic a fundamental characteristic that goes to its overall performance, or is it a management characteristic that is just used to help you manage the portfolio and decide, for instance, what parts of it to sell, what parts of it to buy, and what parts of it to use for your expenses? So things like bond ladders and bucket strategies and things that involve labeling are all management features or characteristics. They do not change the overall performance of the portfolio, which is dictated by the portfolio construction and the macro allocation of that construction. And there is a lot of confusion spread by the financial media and the financial industry about the difference between these two things. because it's advantageous for the financial industry in particular to spread the idea that these sorts of management techniques are special sauce that you ought to pay for. Because only one thing counts in this life.

Mostly Voices [28:43]

Get them to sign on the line which is dotted.

Mostly Uncle Frank [28:46]

Unfortunately, the financial media loves these labels because they make for great headlines and lists and things like that.

Mostly Voices [28:58]

There's a lot of wheel spinning going on there, but it attracts lots of clicks and eyeballs. Everyone's a winner, bargains galore. That's right, you two can be the proud owners of the quality goes in before the name goes on. How do we do it? How do we do it? Volume, volume, turn up the volume.

Mostly Uncle Frank [29:19]

the danger here is that amateur investors don't appreciate the difference between what is portfolio construction and what is just a portfolio management technique and often overpay for portfolio management techniques like bond ladders. But it is a telltale sign if you're talking to a financial advisor and they're talking to you about how they're going to fix your portfolio problems with a bond ladder. They either don't know what they're talking about or they're trying to oversell you on what a bond ladder is and what it can do. That's right, it's for lazy chops and dices and slices, never stops, lasts a lifetime, 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, it delivers a pizza. And so there was another good article about bond ladders and these psychological features by Harry Sit at the Finance Buff that also came out last week. And I will link to that in the show notes as well. It says similar things to what Ben Carlson was saying. But there's a nugget in there I think you really need to appreciate, which is this, quote, Just don't pay fees to someone who sells you on managing a bond ladder for you. Some brokers sell muni bonds or corporate bonds to retirees for large hidden fees. Some financial advisors create bond ladders to justify their asset management fees by quote adding value unquote. These are all dubious practices. I drink your milkshake. I drink it up. Dubious practices. If you want a bond ladder for psychological comfort, Do it yourself. Why should you do it yourself? Because it's easy and it's not worth a whole lot of money in terms of paying somebody.

Mostly Voices [31:19]

You are correct, sir. Yes.

Mostly Uncle Frank [31:23]

Now, the advantages of managing bond ladders is the predictability of the principal and then being able to match bonds as they roll off to expenses. which is often what people use them for. The big disadvantage to holding them, that is if you are going to do portfolio management properly and rebalance properly, they are difficult to use for rebalancing because in order to do it properly you need to go back and reprice all of your individual bonds against the market to determine what your allocation is and what category it fits into in terms of duration before you can analyze what you need to rebalance and how you need to rebalance it. So it requires several extra steps to use a bond ladder and do rebalancing properly. Because funds are of constant duration and managed to have constant duration and they are already marked to market so you could know what their value is in relation to the other things in your portfolio. They make it much easier for rebalancing purposes. But you can do either one or a combination of them, whichever is more comfortable for you and matches your personal situation. Just don't think you found something magical by buying individual bonds. There's no magic there.

Mostly Voices [32:46]

Forget about it.

Mostly Uncle Frank [32:49]

It's just the same thing in a different container. Hopefully that was instructive and you will read those articles. And thank you for that email.

Mostly Voices [33:03]

Class is dismissed. Bow to your sensei.

Mostly Uncle Frank [33:08]

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, give me some stars, 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 [33:48]

Let me ask you something. When you come in on Monday and you're not feeling real well, does anyone ever say to you, Sounds like someone has a case of the Mondays? No. No, man. No, man. I believe you get your ass kicked saying something like that, man.

Mostly Mary [34:08]

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.