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. 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 [1:23]

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 [1:34]

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 [2:47]

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 Chipton cracked mugs, along with what our little free library has to offer.

Mostly Voices [3:14]

But now onward to episode 225.

Mostly Uncle Frank [3:19]

Today on Risk Parity Radio, we're going to do what we do best here, which is answer a few emails. But before we get to that, I noticed today that Morningstar put out a new report on their forecast for portfolio returns and their new, corrected safe withdrawal rate from the report they did last year. Surely you can't be serious. I am serious. And don't call me Shirley. Now that report we talked about back in episode 128, and it was one of the rants I used to do. Maybe I should do a few more. But I haven't looked at this in detail. They have upped their estimate now to a safe withdrawal rate of 3.8%. And you can see why when you take even a cursory look at their report, because they finally fixed these ridiculous projections they had for long-term stock market returns. Crystal Ball can help you.

Mostly Voices [4:20]

It can guide you.

Mostly Uncle Frank [4:23]

So last year they were saying that large growth US stocks were going to only return 6.25% over the next 30 or 40 years. They've upped that now to 9.65. They've taken large cap value and gone from 7.97 to 8.96.

Mostly Voices [4:38]

Now you can also use the ball to connect to the spirit world.

Mostly Uncle Frank [4:42]

Small cap growth, they made a smaller adjustment, 10.17 to 10.58 and small cap value, 10.53. And the new projection is 12.4.

Mostly Voices [4:54]

I could have used a little more cowbell.

Mostly Uncle Frank [4:58]

What is this really telling you? Their methodology is not very good.

Mostly Voices [5:05]

You can actually feel the energy from your ball by just putting your hands in and out.

Mostly Uncle Frank [5:10]

Because you shouldn't be having to change your forecast by up to 50% your long-term forecast as to what you think the stock market's going to return or portions of the stock market are going to return. That was a bad methodology last year. The crystal ball is a conscious energy. It looks like they've attempted to fix it. I don't know whether they've really fixed it, but this shouldn't be changing by those kinds of metrics every year. It appears they're still using this bad portfolio that's tilted more to large caps for their analysis instead of using more of the small cap and more of the small cap value.

Mostly Voices [5:48]

I gotta have more cowbell. I gotta have more cowbell.

Mostly Uncle Frank [5:51]

Which they themselves say will outperform the the other sectors over the next 30 years using their analysis. So if you believe their analysis, you want more of that small cap value in your portfolio. That's what I get out of this. Guess what? I got a fever and the only prescription is more cowbell. I will be curious to see what Michael Kitces has to say about this when he gets a hold of the data, since they don't have all the data in this report. But I will link to it in the show notes and you can check it out and I'm sure we'll be talking about it more later.

Mostly Voices [6:29]

That's not an improvement.

Mostly Uncle Frank [6:33]

But what this really tells you how god-awful that report was in 2021. It was just not very well constructed and not very well conceived.

Mostly Voices [6:41]

Everyone in this room is now dumber for having listened to it. I award you no points and may God have mercy on your soul.

Mostly Uncle Frank [6:52]

But enough about that for now. It is time to get to your questions. And so here we go.

Mostly Voices [6:59]

Here I go once again with the email. And?

Mostly Uncle Frank [7:03]

First off. First off, we have an email from Charlie.

Mostly Voices [7:09]

Charlie bit me.

Mostly Mary [7:13]

And Charlie writes, what does it mean to rebalance your portfolio? I'm a kid, so don't explain it in a complicated way.

Mostly Voices [7:25]

Well, Charlie, you like movies about gladiators. Have you ever been in a Turkish prison?

Mostly Uncle Frank [7:35]

Charlie, this is actually a very good question because it's something that I see amateur investors get confused about very often actually, and they confuse it with something else. The difference between rebalancing a portfolio and reallocating a portfolio. Well, we'll talk about both. Yes. And I'm going to try this with a very simplistic example. So when you set up your portfolio, you have to decide how much of each fund goes in the portfolio. So a very simple retirement portfolio might have one stock fund in it and one bond fund in it. And classically you would set that up so the stock fund would be 60% of the portfolio and the bond fund would be 40% of the portfolio. Now over time as the stocks and bond funds go up and down in value as they will, they will get out of balance. So you may end up looking at your portfolio next year and it may look like it's got 50% of the stock fund in it and 50% of the bond fund, or it might look like it's got 70% of the stock fund in it and now only 30% of the bond fund. Now rebalancing is just putting it back to where it was to start with. So if your portfolio had drifted into a 70% stocks and 30% bonds. To rebalance it, you would sell some of the stocks and buy more bonds so that the overall allocation would go back to 60% stocks and 40% bonds. So all rebalancing is resetting a portfolio back to what it was when you originally set it up. In fact, resetting the portfolio is probably a more descriptive and accurate term than rebalancing the portfolio. Now, where this gets complicated is when you start thinking about the rules for actually doing it. First of all, you can have many more and you probably will have more funds than two, at least in a retirement portfolio. You might only have two where you are right now. So that would be one complication you'd have to deal with. The second complication is just how often do you want to do this? Because doing it too often doesn't actually help it perform any better. And with these simple kind of portfolios, the usual recommendation is to rebalance it once a year, which is probably enough for a simple kind of portfolio like that. So you could do it just looking at a calendar and rebalance it once a year. You could rebalance it once a month or once a quarter or once every two years if you wanted to. You just need to set a rule and stick with it. Studies have shown that rebalancing a portfolio like that more than about once a year doesn't really add anything to it. Now the other way of rebalancing, the other kinds of rules you could have are called rebalancing on bands. And that is where you're not using the calendar But you are looking at it every so often. You use a calendar for that. So suppose you look at it every month, once a month, and you decide, okay, in my 60/40 example, if this goes up to 70/30, then I'm going to rebalance it. Or if it goes down to 50/50, then I'm going to rebalance it. And so you would be watching that periodically. And if it triggered that, banded, if you will, then you would rebalance it based on that band. So that leads to the question of, well, what's the best rule to have for this? And there is no one answer for that. And in fact, nobody's come up with a definitive answer for that. I will link to an article in the show notes that you can read about comparing rebalancing on calendar versus rebalancing on rebalancing bands. But it also has to do with what's in the portfolio. And in my mind, I would think that the optimal rebalancing rule for any portfolio is going to vary and change based on what sort of things you have in the portfolio. And there is not some one big rule written up about this. But if you're just looking for a basic default rule, doing it once a year is never a bad option for this sort of thing. Now if you are just starting out and you are accumulating, you're probably not going to have that much use for rebalancing really. And the reason is this, you probably want to have a portfolio that is almost entirely stock funds in your accumulation phase. If you can stomach it, having a portfolio that is 100% stock funds, is probably optimal for somebody with many decades to go in terms of their accumulation because you're going to be adding to this portfolio over time. Now, a very simple portfolio that's 100% stock funds that seems to perform better than, say, a single total stock market fund would be to have half of it be either A large cap growth, total market or S&P 500 fund. And that would be funds like VUG, VTI or VOO, which are all Vanguard funds. And then you would combine that with a small cap value fund like VIOV and have a 50/50 portfolio of those two things.

Mostly Voices [13:22]

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

Mostly Uncle Frank [13:27]

And if you have something like that and you're accumulating, you could rebalance it once a year, but you could also just contribute to the thing that looks low in any given year. So if the large cap fund has outperformed the small cap fund, you would invest more in the small cap fund that year and keep them about 50/50. This is not an exact science and it doesn't need to be. Now it's also not wrong if you're interested to have other kinds of funds in this kind of portfolio, I just wouldn't expect the overall portfolio to perform much better. So what you really want to focus on is keeping it simple enough and keeping the fees on your funds low. You want to invest in low-cost funds for this purpose. I did do a podcast for newer investors a couple of months ago at Paul Merriman's suggestion. It is podcast number 208 and I would check that out and particularly the Links in the show notes to some useful articles there. Now let's talk about reallocating. Sometimes I hear people say, I'm going to rebalance my portfolio by buying this new fund. If you are buying something new and putting that in your portfolio, you are not rebalancing a portfolio. You are reallocating a portfolio. Now reallocating a portfolio is not something you do on a whim or you take lightly. because one of the best practices for investing is to come up with something that you're comfortable with and stick with it for a long time. People that jump in and out of funds by reallocating frequently underperform the market and they underperform the things they hold because they end up chasing whatever's been doing well recently. And then the thing reverts to the mean and you end up underperforming. So it's better for the most part to stick with something that you're comfortable with, a portfolio, and not be running around reallocating your portfolio frequently. There are a few reasons why you will at some point reallocate a portfolio. The big one is when your life changes. And what I mean when your life changes is when you're going from accumulating a portfolio to decumulating or taking distributions out of it, then you want to start reallocating your portfolio to a retirement style portfolio from your accumulation portfolio. Another time you might reallocate a portfolio is when you find a fund that's a better fit for what you're doing. So you want to replace one of your funds with a different fund. You need to be really careful about this if you're in a taxable account. because there could be tax consequences and that may be a reason you really don't want to do it. But if you have a tax loss and you just want to switch from this one fund to another because perhaps the newer fund has a lower expense ratio, that is the time you would reallocate from one fund to another like that. And then the third reason is the tough one, which is you find something that you would like to have in your portfolio. and you want to add it, but then there's a question as to, well, if you're adding that, what are you getting rid of? And when are you going to do that? Now, if you want to avoid this fund chasing problem, the best time to reallocate a portfolio is when your current portfolio is at or near an all-time high. Because if your current portfolio is at or near an all-time high, you are selling high. If your current portfolio has a bad performer in it and it's not doing well, so like say this year, you would not want to run out and grab something that's been performing well and swap out funds because that's exactly why and how people underperform the market. They wait till something is down, they swap it out for something that looks like it's doing better. and they are effectively selling low and buying high. And you want to buy low and sell high. The way you do that in terms of portfolio reallocation is by waiting until your current portfolio is at or near an all time high. So maybe you have some little wish list. Just keep that on the side. You don't need to be running off reallocating a portfolio every year. the fewer times you do it the better. But wait until your current portfolio is at a near all-time high and then do your reallocation at that time. And if at that time is also a rebalancing period, then you can do both of them at the same time. Sometimes that's more convenient. Hopefully all of that was not too complicated an explanation. I fear that it was, but that is why I also I would invite you to go back and listen to episode 208 because you really don't need to be thinking about all of this when you're starting out investing. All you need to be thinking about is getting in the habit of investing and putting the money into low cost index funds. If you just do that, you can worry about all this stuff much later. And in particular, getting to that first 100,000 of investments, that's a big deal. And you can do that just using one fund if you want to. You do not need to make this complicated to begin with.

Mostly Voices [18:57]

We use the Buddy System. No more flying solo.

Mostly Uncle Frank [19:01]

Just do yourself a favor and stay away from target date funds. They are the prison jumpsuits of investing. Hello, Dad. I'm in jail. Designed to fit everyone so they don't actually fit anyone. Hi, Dad. I'm calling you from jail. All you need is one or two low-cost index funds to get going. And while you're waiting to accumulate that $100K, that is when you go and learn more about investing so that when you get to that $100K, you'll know exactly what to do next and what kind of modifications you might want to make for your individual situation. I like it here. It's nice. And thank you for that email. Bow to your Sensei. Bow to your Sensei. Second off, we have an email from Jimmy.

Mostly Voices [19:58]

Hey, Jim, baby, I see you brought up reinforcements. Well, I'm waiting for you, Jimmy boy.

Mostly Uncle Frank [20:07]

And Jimmy writes. Hi, Frank.

Mostly Mary [20:10]

Where was this sound bite, Attack of the Moon People, that you used in responding to Vern's question from? Thanks, Jimmy. Hey, Vern, I just love these outer space movies, don't you?

Mostly Voices [20:20]

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.

Mostly Uncle Frank [20:44]

Well, Jimmy, that was just a sound clip from the comedian Jim Varney, who created a character called Ernest Worrell, who had all of these kinds of adventures back in the 1980s, 1980s and 90s, it's when Ernest was really popular and he was always talking to somebody named Vern. Oh, hi, Vern.

Mostly Voices [21:03]

Is this your piggy bank? Well, I was just gonna take this money and put it in first federal savings for you, Vern. so your money can make money. Heck, burn time don't mean nothing to a pig. Know what I mean? I'm not sure exactly what show or movie that came from.

Mostly Uncle Frank [21:16]

There were many, many movies and shows and commercials featuring that character back in that time period. Unfortunately, Jim Varney passed away in 2000. He was only 50 years old. But he does live on through earnest. And I will link to a couple of Articles about Jim Varney and Ernest in the show notes. As well as that clip if I can find it again, the full clip. Thank you for your interest and thank you for that email.

Mostly Voices [21:46]

Sleep sweet Jimmy boy. Sleep as long as you like.

Mostly Uncle Frank [21:51]

Last off. Last off, an email from Freya.

Mostly Mary [22:04]

And Freya writes：hi Frank, I just listened to your podcast about your conversation with Paul Merriman. I've recently had a baby and want to set up a portfolio for my son. Yeah, baby, yeah! I had planned on a 100% equity portfolio, VWRA, to give a more global bent as a UK citizen. However, after the show, I was looking at small cap value options, But they only seem to be US slash S&P 500. Is there anything global you can recommend? Or would you recommend to stick with a US small cap value ETF as a two fund portfolio? Thanks, Freya.

Mostly Uncle Frank [22:43]

Well, congratulations, Freya. I hope you're enjoying your new baby. Your new son, I should say, and that everybody's doing well. I don't care about their children.

Mostly Voices [23:00]

I just care about their parents' money.

Mostly Uncle Frank [23:04]

It's funny you mention this in Paul Merriman because I just heard a podcast from Paul Merriman where he is setting up a fund for his new grandchild, which will be half S&P 500 and half small cap value. I'll see if I can find the link to that podcast. so you can hear all about that. But if you are looking for options, there are a couple of options here I think you could try. First, let me just tell you where you can find things like this pretty easily. If you go to Portfolio Charts and go to their My Portfolio Analyzer, where you can put in any portfolio you want, you can change the country of origin from the United States to about seven or eight other ones, including the United Kingdom. And then it will give you specific fund recommendations for specific asset classes. And so if you're looking for a fund outside the US that invests in small cap value, you could try ISVL, which is the International Developed Small Cap Value Fund. Now that will not have any US stocks in it, so you may want to combine that with U.S. fund. You might also look at the Avantis funds. I don't know if they're available though where you are because I know that the fund selections are different in different countries. But there are a couple of there that might be of interest. One is called AVDV, which is a international small cap value fund for developed countries. And then there's AVUV, which is just the U.S. only version of that. Now, I did not find any funds that were worldwide small cap value. I thought I would, but I didn't find one. That doesn't mean it doesn't exist. It just means my capabilities may be limited.

Mostly Voices [24:54]

Man's got to know his limitations.

Mostly Uncle Frank [24:59]

I did also have a look at VWRA, which is not available in the US, but it does look like a good option for you. It is mostly US stocks, I think, out of the first 25 holdings, largest holdings, about 80% of them are your large US companies anyway. If you were looking for, say, a large cap growth fund that was not US, you could look at something like EFG, which might be available to you, but I'm not sure you need to go dealing with that kind of complication for something like this. And that would not include your US stocks. I think the largest holding in that is Nestle. But hopefully that helps and congratulations once again and thank you for that email. Donate to the children's fund.

Mostly Voices [25:42]

Why? What have children ever done for me? But now I see our signal is beginning to fade.

Mostly Uncle Frank [25:49]

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 [26:23]

Joey, did you ever hang around a gymnasium? No, darling bit me. And that really hurt, John. It's still hurting.

Mostly Mary [26:39]

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.