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 [1:28]

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. 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 [2:55]

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 223.

Mostly Uncle Frank [3:18]

Today on Risk Parity Radio we have a special treat for you.

Mostly Voices [3:23]

Looks like I picked the wrong week to quit amphetamines.

Mostly Uncle Frank [3:26]

Which is a follow up on episode 209 about safe withdrawal rates and my critiques of what others have done with them. You may want to go back and listen to that first, and hopefully you'll consider this a treat. Only this audience would consider this a treat. You keep using the word.

Mostly Voices [3:45]

I do not think it means what you think it means.

Mostly Uncle Frank [3:49]

But anyway, we have one email to read and then we'll get to it.

Mostly Voices [3:52]

And so without further ado, Here I go once again with the email. And...

Mostly Uncle Frank [3:56]

First off. Second off. Last off. First, second, and third off, we have an email from Daniel.

Mostly Mary [4:13]

And Daniel writes：hi Frank, I'm not sure if you follow Big Earn's blog, but you are being the topic of discussion in this last post. You and your take on the valuation and Schiller PE CAPE ratio of episode 209. What do you say about that? I think you should invite him to your podcast and have an episode about this since it's so relevant to the audience. It seems both of you highly educated people have a disagreement on a very important topic which I'd like to understand better. Thank you, Daniel.

Mostly Uncle Frank [4:40]

Well, before we get to the meat of this, first off, as you know, I do not have guests on this podcast.

Mostly Voices [4:51]

Did you see the memo about this? Did you get that memo? Didn't you get that memo?

Mostly Uncle Frank [4:55]

And that is honestly because it would be too much work, especially on the production side of it. And I did not start this podcast. to do more work or to make more money or do any other sort of thing. I don't think I'd like another job. I started it as a creative outlet to talk about a topic that I enjoy investigating and talking about and to share what I knew with other people as I found it. And then what they create, they give it away rather than sell it. It's gonna be huge. And to have a little fun along the way.

Mostly Voices [5:38]

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

Mostly Uncle Frank [5:41]

So I won't be having any guests or creating any blogs or going to great lengths to expand what I've got going on here. It's not that I'm lazy. It's that I just don't care. That being said, I do encourage other people to do such things. Yes! And should remind all of you that one of our listeners, Justin, has created an entire blog with resource pages called Risk Parity Chronicles that is also devoted to this topic. Young America, yes sir! And if you haven't checked that out already, I would commend you to check that out. I also don't mind going on other people's podcasts either by myself or with others, or speaking at an occasional conference or two. I do have one of those set up for next March. It's Diana Merriam's Economy Conference in Cincinnati, Ohio.

Mostly Voices [6:44]

I'll link to that in the show notes.

Mostly Uncle Frank [6:46]

You can check it out and get tickets. And I'll be doing a breakout session there on Retirement related topics. And probably some portfolio allocation. Groovy, baby! I'll link to that in the show notes. It's a very fun little event. The best, Jerry. The best. But now getting to the topic at hand. After that episode, Karsten Jeska did reach out to me and asked to be a guest on the show, and I told him, no, for the reasons I just told you. I have people skills.

Mostly Voices [7:21]

I am good at dealing with people.

Mostly Uncle Frank [7:24]

Can't you understand that? But instead what I offered is that we would sit down and have our own Zoom chat, which we did now a couple of months ago, and we went over some cape ratios and other things.

Mostly Voices [7:35]

Yeah, baby, yeah!

Mostly Uncle Frank [7:39]

It's kind of like the celebrity death match featuring Jerry Seinfeld and Tim Allen.

Mostly Voices [7:47]

In the red corner, from New York City, Zultan Jerry Seinfeld. And his opponent, hailing from Detroit, Michigan, here is Tim the Toolman Allen. I think Carson's definitely the Seinfeld of those two, and I'm definitely the Tim Allen, 'cause I'm more of the goofball. You can make all the laws you want, he's still gonna bother people.

Mostly Uncle Frank [8:10]

But let's talk about what we learned from this exchange.

Mostly Voices [8:13]

Gentlemen, let's get it on. There's the bell.

Mostly Uncle Frank [8:23]

I think the most important communications actually occurred after the call because I wanted to use Carsten's safe withdrawal rate tool that he's got there on his website to analyze a sample portfolio because his data sets go back much further than a lot of the data sets you'll see at, say, Portfolio Visualizer or Portfolio Charts. So I gave him a kind of simplified risk parity style portfolio to run.

Mostly Voices [8:50]

What kind of punk-ass fight do you think I'm running here, Tim Allen? Bringing all kind of tools to the ring.

Mostly Uncle Frank [8:57]

I asked him for it to be 27.5% in S&P 500, 27.5% in small cap value, 15% in long-term treasuries, 15% in short-term treasuries, and 15% in gold. And we had to modify that slightly in order to make it work in the tool because you can't do short and long-term treasury bonds. So he settled on just doing 30% intermediate treasury bonds for the bond portion. And then the other issue is that although his data goes all the way back to 1871, We can only go back to 1926 for the Fama-French factors. So hopefully almost 100 years of data would be good enough for this purpose. And so that's what we ran. Ultimately, what he showed me how to run was 27.5% in small cap value, 27.5% in the S&P 500, 30% in intermediate treasury bonds, and 15% in gold. So this is a spreadsheet tool, so I'm not going to be able to link to this directly in the show notes, but I'm going to tell you how to recreate it as Karsten showed me. What you need is to go download the tool from his site. I'll give you that link and then put in the following parameters for the analysis on the first page of the set of spreadsheets. Okay then, now we're finally ready for a clean hard fight. This is all in column B, starting with line seven, which is labeled stocks, S&P 500 US large cap. You put 55% in that box. Then you can go to the Fama French style factors, which are in rows 15 and 16. The way he said to do it was to take 30% and put that in small stocks. That's in column B, row 15. Put 27.5% in row 16, column B, and that's the value stock portion. And then go back up to the bonds, the 10-year US Treasury, that's row 8. Put in 30% on that row, and then in row 13, put in gold, 15%. Now you also need to adjust the retirement horizon or how long this retirement is. I wanted to use a 30-year time horizon for this purpose just because that's kind of the standard thing that everybody uses for comparison purposes. And so you need to go down to row 33, retirement horizon and put in 360 months or 30 years. in the box that's there. I think it may be set to a 60-year retirement when you open it up. So that sets up the parameters. Now when you go ahead and run this analysis then you look in the results box also on that page and it has failure probabilities to different initial consumption rates, which is essentially your SWR calculation. And for this portfolio going back to 1926, you do not have any failures until you get up to 5% as the safe withdrawal rate. And then the failure rate at 5% is 0.93% since 1926 and 1% since 1950. And you can also look at the safe consumption or safe withdrawal rates to target different failure rates. in the box below and the results there. And at a failure rate of 0%, you can go up to 4.91% with this portfolio going back to 1926. At a 1% failure rate, it goes to 5.06. If you wanted to go all the way up to a 10% potential failure rate, it's 5.8. And for comparison purposes, if you put in, say, a 70/30 standard kind of portfolio in this calculator, you'll see that one failing much earlier or lower at more like 4.25%. And so all of this confirms what I say over and over again in this podcast, is that a more diversified portfolio that has risk parity characteristics performs better than standard portfolios. And now we know that going back to 1926, as opposed to the data set you might get at Portfolio Visualizer or Portfolio Charts, which only goes back to 1970. And you may be asking, well, why did I pick this particular sample portfolio? The reason I picked it is because in the Safe Withdrawal Rate series that Karsten has written, blog post number 34 indicates that you will improve the safe withdrawal rate of a portfolio if you put 10 to 15% gold in it. So I just went with 15%, otherwise adjusted what would ordinarily have been a 60/40 portfolio to make room for the gold in the stocks and bonds, and then just made an arbitrary split of half small cap value, half S&P 500. Now you could probably do better than that, but the point of this was not to find the best portfolio possible. It was simply to show that making these obvious changes, improves your standard portfolio by about 20% in terms of your safe withdrawal rate. Because that's the difference between four and five. That's the fact, Jack. That's the fact, Jack. Now you'll also see in that results box a column for CAPE ratio less than 20 and one for CAPE ratio greater than 20. Now, that column, the way the spreadsheet is set up, automatically takes you back to 1871, regardless of what portfolio you're trying to analyze. So, it in fact does not analyze what we were trying to analyze if you just run this. In order to modify that, so it's only looking at the data since 1926, what you need to do is use the Find Replace dialog, use Ctrl H and replace all of the dollar sign 8s with dollar sign 667s to make the formula only go back to 1926 for those columns. And if you do that, you'll see that it doesn't matter what the CAPE ratio is, all the way up to 5% safe consumption rate or safe withdrawal rate. And that's because zero is zero. Forget about it. Now since we did this email exchange after the Zoom call we had, we did not discuss this on the Zoom call we had, although I have some other notes to go through. But let's go back now and talk about what we talked about during the call about cape ratios and their use or misuse, as I would say. And here come our fighters.

Mostly Voices [16:19]

Why'd you do that for you? Are you a big dumbass? Yeah, well, I'd rather be a dumbass than a baby. Shut up! you! shut up. You! You!

Mostly Uncle Frank [16:31]

And I went through my historical thinking about Cape ratios and how I had seen them used and then what information I had learned in the past 10 years about them. And my first real exposure to these was around 2011. When a lot of popular people, including the Jack Boggs of the world, the John Hussmans, the Jeremy Granthams, were looking at the CAPE ratio at the time and saying that it still did not come down far enough from 2008. So what they were saying, what everybody was predicting at the time in 2011, That the stock market would have to fall because the CAPE ratio had to get lower before there was going to be a recovery. And it was still in the 20s at the time. So they were saying, well, it certainly hasn't fallen far enough to get a real recovery. Now, of course, all of that was wrong. We know that in hindsight. And it was actually known within a few years because everybody was saying that, well, we should expect that the stock market returns are going to be abnormally low for the next 10 years starting in 2011. And I've cited previously to a famous Morningstar article from then, which you can find in my various show notes. But anyway, after a few years of that being wrong, people sat down and started really analyzing what was the use of these CAPE ratios. What could they be used for and what should they not be used for? And some of the best analysis around that time, we're talking about 2014 to 2016, was done by Michael Kitces. And so what I went to do for the purpose of this Zoom chat was go back and pull out these articles that Kitces had written in 2014 and 2016 about what the CAPE ratio could be used for and what it could not be used for. And I will link to the articles in the show notes so you can check them out. But basically the upshot of what you learn from those articles and the analysis he did there is that using CAPE ratios was pretty darn useless for anything that was, say, zero to 10 years. It was also useless when you get out past 30 years, like an actual retirement. The only predictive value it seemed to have was around 10 to 15 years, and then that was arguable and debatable. But this really created a trap for people who were using CAPE ratios as a basis for forecasting 30-year retirements and longer, because what Kitz has said is that if you're going to have a bad period to start out, as some CAPE ratio prediction might predict, you would have to change your later forecast to forecast a better period after that, which just means over time, the market does go back to its kind of average returns, whether it's having a good period now or a bad period. Over the course of many decades, it does seem to go back to kind of median returns, which are around the 7 to 8% real return. But I feel like people did not appreciate this or incorporate this into their analyses after 2014 or 2016, when this analysis was done. And you see that, particularly in that Morningstar report that came out in November of 2011. And Kitz has pointed out, after looking at that report, that they fell into exactly this trap of misusing the CAPE ratio as a basis for forecasting long-term retirement. And in that case, all of their forecasts were based on some version of a CAPE ratio. So it was just a bad methodology for forecasting. Now, on our Zoom chat, I went through these with Karsten and we talked through them. He was actually familiar with them, hadn't read them in a while, read them again, but agreed that they were accurate. So we had agreement on what those articles say, at least from my perspective. He didn't find anything objectionable to what Kitsis had done. Nevertheless, he still thought they had some value, at least in an intermediate term forecasting, and the articles that Kitsis wrote do suggest that they do have some in that respect, and you can read them. And I can see how he might come to that conclusion that if yes, you are using some kind of standard 60/40 or 70/30 portfolio, or the only assets you're allowed to put in there would be an S&P 500 fund and an intermediate or total bond fund. So in a sense, we both agree we're looking at the same glass. But he's saying the glass is half empty and I'm saying the glass is half full. He's saying that, yes, if you use this portfolio, you're going to have a problem and I can measure it with these CAPE ratios. And I'm saying, well, you don't have a problem if you used a better portfolio.

Mostly Voices [21:42]

Johnny, the dreaded purple nurple. I haven't seen this move since the fifth grade. Amazing, Nick.

Mostly Uncle Frank [21:50]

And so I still maintain that that's what we should be talking about now. What is the best portfolio we can construct today? out of basic low-cost ETFs or mutual funds, if you prefer, and not what was the best we could do with some portfolio we were stuck with back in 1997 or whenever. Which leads us to two other topics in the glass half full, glass half empty, category that we talked about. One was referred to in the subsequent emails and we chatted about this briefly, but we didn't really get into it that much. I'd say these two are actually pretty evenly matched at this point. Wimp versus wimp.

Mostly Voices [22:40]

Sissy versus sissy. You said it, brother. Jerk Mo, Jerk Mo.

Mostly Uncle Frank [22:48]

But Carson takes the position that factor analysis Frank Vasquez：probably not relevant. And in particular, he wrote a blog post that he referenced in one of the emails he sent me and I had read before where he was very critical of Paul Marimon's take on small cap value stocks, small cap value funds.

Mostly Voices [23:06]

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

Mostly Uncle Frank [23:14]

In Carson's view, you shouldn't rely on Fama French factors or factor analysis. and you should assume that all the stocks are going to perform like the S&P 500, and therefore you should only model portfolios that are based on the S&P 500. What he says in that article is he thinks that what you would call a factor premium has gone away or is going away because now that people know about it, they're basically trading it such that it's removing any advantage you had because everybody knows about it now. But he lays all of this out in the blog post and I'll link to that so you can check it out in case I've misstated what he said. Don't be saucy with me, Bernaise. My view on that is that there is no evidence that that factor analysis first discovered by Fama and French has gone away. But even if it had gone away in terms of the superior returns that small cap value has had over the course of the last century, you would still want that in your portfolio for diversification purposes because there are certain periods and certain economic conditions where small cap value and in particular the value factor greatly outperforms the rest of the market. and especially the growth stocks. We're actually in one of those periods right now. If you look at the performance of value versus the total market or growth this year, value is 10 to 15% better. Some of the value funds are actually positive for the year, believe it or not. And that was also true in the 1970s, particularly the period starting in 1975, to the early 80s. That decade was a big value tilted decade in terms of performance. And so my view is that is really why you especially want that in a retirement or drawdown portfolio because it tends to smooth out the overall volatility of your stock component, which therefore leads to a greater projected safe withdrawal rate. So regardless of whether you think small cap value is going to outperform the rest of the market, you would still want it in there in a drawdown portfolio for diversification purposes.

Mostly Voices [25:46]

I'll be honest, fellas, it was sounding great, but I could have used a little more cowbell.

Mostly Uncle Frank [25:54]

And I think the Merrimans and the Larry Swedrows and the Bill Bengen's all agree with that. I think it is actually moving towards a consensus that just about everybody agrees with that. I've even heard Wade Fauwd allude to it, and I've certainly heard the guys at Rational Reminder talk about it.

Mostly Voices [26:12]

I got a fever, and the only prescription is more cowbell.

Mostly Uncle Frank [26:19]

I also ran across an interesting analysis from a researcher at Bloomberg where he analyzed what asset classes perform the best in inflationary environments. And as it turns out, value and surprisingly momentum are the best performing factors in terms of inflationary environments. And I'll link to that analysis in the show notes. I haven't gone through all of it, but it's very interesting. because it's done over a long period of time and I haven't seen anything quite like it. It was featured on a podcast called the Market Huddle and there's a YouTube video that goes with that along with the presentation. The real problem with trying to say that this time is different and that something is not going to be the same as it was for the past 100 years is you have to have a really good reason to say that.

Mostly Voices [27:16]

real wrath of God type stuff. Exactly.

Mostly Uncle Frank [27:20]

Because you are in fact using a crystal ball and you could easily not only be wrong, you could be wrong in the wrong direction. That's not an improvement.

Mostly Mary [27:27]

But again, this does go back to the glass half empty or the glass half

Mostly Uncle Frank [27:31]

full. I'm saying the glass is half full and can probably be improved. And he's saying the glass is half empty and I don't think these Long-term trends are going to continue in the future, or they might not. Well, the problem is they might. In fact, they might even be better in the future. Ooh, the wedgie is not a pleasant experience. And the wedgie goes atomic. But at a certain point here, you are not talking about data anymore. You're just talking about perspectives. I am a scientist, not a philosopher. Now, there were many other things we talked about in this phone call, including Carsten's options trading strategy, which is very interesting and I don't entirely understand. I mean, I understand how it works. I don't understand how to implement it. But he said he was continuing to develop it. So if you are interested in that, perhaps you should ask him that. I'm very interested to see how that develops. I think there was one other topic of note. We didn't talk about it long, but I think it's also worth mentioning in terms of perspective. Why do they call it internal bleeding? If it's internal, it's not really bleeding, is it? And I had mentioned to him that it seemed to be fairly well accepted that the inflation rate for a retiree was not as high as the inflation rate for an average person or the CPI inflation. And what I refer to specifically there is that the research has shown, and this is David Blanchett's retirement smile research, that consumption or spending actually goes down for most retirees, not up. And that if you incorporated that into your safe withdrawal rate analysis, for your inflation assumption, you would need to attack on 0.5 to 0.7 in terms of what the safe withdrawal rate was. At least that's what Wade Faus said. And Karsten's basic response to that was, well, an early retiree may actually want to spend more in retirement than they did before. And so their personal inflation rate would actually be higher.

Mostly Voices [29:48]

I am Seinfeld, king of the sitcom. Hear me roar. Fear my my ref. Laugh at my jokes or experience the consequences. Fight fans, this is the stupidest match I've ever seen. It's the fight about nothing.

Mostly Uncle Frank [30:09]

And so again, that is a matter of perception or personal experience or intent than anything else. In my view, if we're trying to make baseline assumptions for an unknown average person, we should probably use the average assumptions as known based on the data as Blanchard has put together. More importantly, this does go to just a simple idea that as actual retirees, we can really have a large effect on our ability to withdraw funds simply by not inflating our lifestyle. or not inflating it as great as the CPI rate of inflation, which actually is not that difficult if you are not planning on getting a larger house or you have a fixed rate mortgage, or you can downsize, or maybe not buy so many cars in terms of replacements for what you have. Another thing I should probably mention is that he did mention that a lot of these problems about low interest rates and high CAPE ratios may have actually gone away this year since the stock market has fallen and the interest rates you can get now are relatively robust in terms of your bonds and that those two things would change his assumptions and projections. My view remains that these problems, to the extent that they are problems, are best solved with better portfolio constructions and allocations and then management of expenses and being able to vary your withdrawals. But anyway, hopefully that is a reasonable summary of our celebrity death match. I do want to thank Carsten for reaching out and participating in such a thing. Folks, this was an ambush, pure and simple.

Mostly Voices [32:04]

We wrestling announcers are usually so sharp and perceptive about things like that. Just go You never know what's gonna happen here on Celebrity Deathmatch.

Mostly Uncle Frank [32:15]

If I made any misstatements or misrepresented any of his positions, I do apologize for that. I did not make any recordings or transcripts of the conversation, but did take some notes and do have the emails that we exchanged, of course. Hopefully you all found that entertaining or informative or something in between.

Mostly Voices [32:37]

This is pretty much the worst video ever made.

Mostly Uncle Frank [32:40]

And maybe we'll have Death Match 2 sometime in front of a live audience. Fortune favors the brave. But thank you to Carsten and thank you Daniel for writing that email. But now I see our signal is beginning to fade. And I need to go slap a stake on some of these bruises here.

Mostly Voices [33:03]

That and a nickel get you a hot cup of Jack Squat.

Mostly Uncle Frank [33:07]

Just one little note, as I mentioned in the last podcast, if you are in the DC area, I do invite you to come to Lessons and Carols at the Father McKenna Center on Thursday at 7 o'clock to watch me hand out programs. It is on the corner of North Capitol and I Street and it does support the charity that is Affiliated with this podcast. You on the motorcycle.

Mostly Voices [33:37]

You two girls. Tell your friends. Free parking. Free parking. Two dollar cover charge only, folks. That's a lot of entertaining for two dollars. Or two dollars. And is referenced on our support page. We're on a mission from God.

Mostly Uncle Frank [33:56]

If you have comments or questions for me, please send them to Frank@riskparity.com. www.riskparityradio.com, that email is frank@riskparityradio.com, or you can go to the website www.riskparityradio.com and put your message into the contact form and I'll get it that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, give me some stars, a review. That would be great. Mmmkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off. I tell you, what a wonderful, fantastic event this has been.

Mostly Voices [34:32]

Only in America could there be a fight like this on a night like this in a beautiful Brazilian city like this. Don't. No.

Mostly Mary [34:44]

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.