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]

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 [1:50]

But now onward to episode 251.

Mostly Uncle Frank [1:55]

Today on Risk Parity Radio we've got some very lengthy emails, what we tend to specialize in on this program. So you'll be hearing a lot from Mary today. Mary, Mary, why you buggin'? And so without further ado, here I go once again with the email. And? First off, first off, we have an email from Pete. How many lumps do you want? Oh, three or four?

Mostly Voices [2:34]

And Pete writes?

Mostly Mary [2:38]

Uncle Frank, first, the obligatory acknowledgement of the great service that you render to the rest of us DIY plebeians. It is very much appreciated. One, because you've remained an incorruptible mind in service to a higher purpose without succumbing to used car salesmanship or general fear-mongering. Forget about it. And two, you're enabling a learning platform for us to grow and improve upon others' efforts while not pretending that you're the singular source of all knowledge and information. The great Oz has spoken.

Mostly Voices [3:10]

I do have one question that I can't seem to figure out.

Mostly Mary [3:14]

By my nature, I am not a gambler. I tried it once in a casino in Latvia and quite literally lost 500 euros in about 12 minutes. That's not an improvement. I spent the next three hours trying to recover that money in free drinks while watching my buddy win and then lose significant quantities of money until he ultimately barely broke even after an emotional roller coaster. A perfect analogy in my mind for day traders and market timers. You can't handle the gambling problem.

Mostly Voices [3:46]

Anyway, to the point.

Mostly Mary [3:50]

The logic of using leveraged funds to amplify annual returns while minimizing volatility risk to maximize safe withdrawal rates through underlying uncorrelated assets conceptually makes sense. The concern I have is in practice. UPRO, for example, states that it is not a buy and hold ETF. It's a short-term tactical instrument. Like many leveraged funds, it delivers three times exposure only over a one-day holding period. Over longer periods, returns can vary significantly from its headline three times exposure to the S&P 500. The same appears to be true of other leveraged funds traditionally seen in leveraged risk parity portfolios, TMF, TNA, etc. Finally, why would the daily resets differ significantly from the returns of a longer holding period? Wouldn't the cumulative one-day returns produce a similar result as a long-term headline three times exposure to the underlying index? And what does this mean for rebalancing rules regarding leveraged portfolios? Should the portfolio be rebalanced more often or perhaps more closely held to a rule like pruning any holding falling beyond a 20% deviation? Certainly not rebalanced every day, right? I can't help but wonder if these leveraged ETFs won't ultimately perform differently than we assume they will within a diversified portfolio. I assume you'll allay my fears above with sage wisdom. So supposing leveraged ETFs still make sense, is there a mathematical approach to optimizing portfolio construction using variables like asset correlation, standard deviation, and annualized return for each asset? Between your website and Risk Parity Chronicles, most levered fund allocation seems to be rounded to 10% or kept in line with a theme like the Levered Golden Ratio's leverage amount of 157.5 over 100, roughly the golden ratio, or the Accelerated Permanent Portfolios for Funds in Four Different Asset Classes, roughly 25% each. I'm hoping you don't tell me that I need to dust off my university calculus books and review first or second derivatives.

Mostly Voices [6:08]

Have you ever heard of Plato, Aristotle, Socrates?

Mostly Mary [6:12]

Again, much thanks for all that you do. It's opened my eyes in many ways as I start approaching my own retirement and how I should strategize. De oppresso liber, Pete.

Mostly Voices [6:26]

Pete, how many lumps do you want? Oh, three or four. Well, Pete, I'm always happy to help out the plebeians. Now that I'm a member of the club, what can I do? I had more fun as a club steward. 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. And I'm glad you appreciate the show.

Mostly Uncle Frank [6:54]

I really do not consider myself as a knowledge originator, but as a knowledge aggregator. Bowed to your sensei. Bowed to your sensei. Because it seems to me there are kind of three kinds of silos when it comes to finance and personal finance in particular. The good. The bad. The ugly. You have the one silo that's the academic research. You have another silo that are the professionals and the hedge fund operators. And then we have this third silo, which are the personal finance enthusiasts and people who are trying to DIY things. And it seems to me that the best approach is to take the best of what all three have to offer. The best, Jerry, the best. but then mercilessly shave off the sales pitches and any obsolete material we find, and hopefully I've been somewhat successful in that endeavor in between the frolics, detours, and other nonsense.

Mostly Voices [8:07]

Battle speed, Hortator. Battle speed. Attack speed. Attack speed.

Mostly Uncle Frank [8:28]

Ramming speed. Ramming speed. But getting to your question, we have more about leveraged funds here. It seems to be a very popular topic these days. Now, this is an interesting debate though as to whether these leveraged funds that are originally designed for short-term holdings like UPRO can be appropriately held for longer terms. And there's a lot of good discussion about this over at Optimized Portfolios. I'll link to an article in the show notes. But then I've also found more academic articles which challenged that very thesis. And I found a good one called the Leveraged Behavior of ETFs. And it even has the English spelling of behavior. And basically what it says is that the idea that leveraged ETFs are not appropriate for long-term buy and hold is a myth and gives a lot of numerical analysis to support the thesis. So I thought it was pretty well done and actually does also go into what it considers to be an optimal amount of leverage and concluded that it's probably around two, but I did not go through all of the math there. And I think it's probably slightly less than that if I had to guess at it. Now it does go into the three reasons that a leveraged ETF may underperform its multiple of whatever it's tracking. One of those is simply its fees, and these things do have much higher fees than normal ETFs. The fees are generally close to 1%, although they're getting less over time. And certain funds like NTSX have fees that are down around 0.2. Another potential problem is tracking error. that however they've constructed the leveraged ETF, it does not actually accurately track the index that it's supposed to be tracking. And the third one is what is called volatility drag, which has to do with the fact that since they are much more volatile over long periods of time, you have the same issue with looking at the arithmetic mean of say the S&P 500, which is around 12% with its compounded annual growth rate, which is closer to 10%. And that's just because when something goes down, say 20%, it has to go up 25% to get back to where it was. I think this is best illustrated just by looking at a few comparisons using Portfolio Visualizer of UPRO versus an S&P 500 fund, TMF versus TLT, and TNA versus IWM, which are all the corresponding indexes that they are attempting to follow and leverage. And you'll see over long periods of time, they are very much different in performance due to that volatility, because sometimes they vastly overperform and then sometimes they vastly underperform, depending on how the underlying thing is doing. But I'll link to those in the show notes so you can check them out. at least for these individual ETFs, the leverage does tend to increase the volatility enough that it reduces the Sharpe ratio, which is why you can say there is an optimal amount of leverage and it's probably less than three. But it's a very interesting article and you should check it out if you are interested in this topic. Regarding rebalancing, I know we've talked about this before in the context of leverage funds. But I think that the approach should be to do it on bands, like 20% different from what the target allocation is, because you do want to rebalance these things more often. That's part of the attraction to them, is that they will generate more rebalancing opportunities, so you'll have more opportunities to buy low and sell high just over the natural course of performance of these things. We do not in fact know what is optimal for these kinds of portfolios. We do know from a Michael Kitces article that at least for ordinary portfolios, about 20% relative deviation from where they started tends to be a decent place to do a rebalancing, as long as you're not scheduling the rebalancing too often. So with our sample portfolios, the leveraged ones, we've took an approach that we're only going to look at it once a month on the 15th of each month. But then for the two most leveraged ones, we're looking at variations that are 7.5% different from where they started, which is about 20% of the ones that are one third a leveraged fund. But I did want to simplify those rules for the purpose of management. If you are looking at these portfolios yourself, one way you can do it is go into Portfolio Visualizer on the backtests and change the rebalancing rules for them. And you can see the differences for whatever portfolio you're putting in there. You can set it to rebalance on bands, either relative or absolute, in addition to setting it on timeframes. But there is no clear total answer to that because it's going to depend on each different portfolio. Now your question, is there a mathematical approach to optimizing portfolio construction using variables like asset correlation, standard deviation, and annualized return for each asset? And the answer is yes, there is. It's called an efficient frontier calculation. There is a calculator like that over at Portfolio Visualizer, but all of these types of portfolios are subject to the available data. And sometimes they seem to give you useful information and sometimes they don't. Part of the problem always is using standard deviation for things that are not normally distributed like financial assets. You can throw a monkey wrench in the works. But that mathematically is the way to do it. There's a nice calculator over at Portfolio Charts that's a risk return kind of calculator. that you can set the different axes on that's based on these kind of calculations. And I'll link to that in the show notes. That is fun and interesting to play with. What do you mean funny? Funny how? But I definitely would play around with those kind of tools if you're going to construct a levered portfolio. And go read the articles over at Optimized Portfolios where they've taken a lot of classic portfolios and lever them up to see what happens. I don't think you need to dust off your calculus books. The math isn't quite that heavy, although if you did go into the particulars of the efficient frontier calculation, it would get pretty hairy. Real wrath of God type stuff.

Mostly Voices [15:41]

Hopefully that helps and some of these resources may help.

Mostly Uncle Frank [15:46]

I think they're pretty good resources I was able to dig up this time for this. And thank you for your email.

Mostly Voices [15:53]

By the way, how many lumps do you want? Oh, better give me a lot of lumps. A whole lot of lumps. Second off. Second off, we have an email from My Contact Info. Oh, I didn't know you were doing one.

Mostly Uncle Frank [16:13]

And My Contact Info writes：Dear Frank,

Mostly Mary [16:16]

spectacular episode. Your characterization of portfolio management strategies was very interesting. Perhaps it is always worth considering investment decisions as essentially math problems and avoid explanations that are overly qualitative, as such explanations may not adequately expose essential trade-offs. Relatedly, I'm not sure that the quantitative explanations are necessarily harder to internalize depending on how they are presented. Wade Pfau on his podcast, Retire with Style, goes into great depth on different withdrawal strategies. I mention this because many of the income protection strategies, although perhaps suitable for some, may illustrate the points you make in the podcast, namely that the verbiage used to explain these strategies may mask the underlying math and lead to potential confusion. Sorry for rambling, but I think you make a very good point. the risk of obfuscating withdrawal math by using verbal heuristics. The math is not necessarily hard and more precise. Example, bucket strategy may connote safety, which may or may not be true depending on various random variables. Thank you.

Mostly Uncle Frank [17:33]

All right, just for reference, my contact info is referring to episode 240, where I was asked a question about Minimum Dignity Floors, and I went off into an explication of approaches to drawdown strategies and why I thought some of them were misleading due to the verbiage that is used, and they don't necessarily focus on the big picture or the overall math before getting into cutesy names and strategies. I award you no points, and may God have mercy on your soul. Honestly, what I think this comes down to is what I would call a conflict of persuasion. One of the things we learn as lawyers is how to take complicated information and boil it down into its essential components so that you can present something that is complex, like a financial calculation, to a judge or a jury in a way that's easy to understand. But you always do lose something in that translation, even though the simpler version is often more persuasive. And I think the financial advisor world faces this problem head on.

Mostly Voices [18:46]

Always be closing.

Mostly Uncle Frank [18:51]

That conveying the information they learned in their CFP or CFA course in its raw form is not likely to be persuasive or even understandable to most of their potential clients. So what they need to come up with is some way of presenting that information in a more attractive form that involves labels and narratives and something that's much easier to understand without having to get into the numbers of the thing. Because most people who go to financial advisors are looking for somebody to take care of all those numbers for them and tell them they're going to be okay. and help them with various other financial decisions along the way. The problem for the do-it-yourself investor, particularly if you are consuming a lot of personal finance books, is that oftentimes the authors of these kind of books take on the labeling or the narrative as the actual operative strategy of something because they don't really understand the big picture and the math of portfolio construction, for example. So things are prone to be distorted and or misused. One good example of that is this whole history of what is called the bucket strategy that was invented by a financial advisor named Harold Evensky back in 1985. And it was not invented as a strategy. It was invented as a psychological tool. And the whole idea of the strategy was to shave off whatever portfolio they were actually holding for retirement. Say it was a 60/40 to shave off a little piece of that to cover next year's expenses or next quarter's expenses and to just lather, rinse, repeat and do that every year. And if you listen to interviews of Harold Evensky, he'll tell you that it's not something that optimizes or actually helps the performance of a portfolio. It's a psychological device. But like that game of telephone that some of us may have played in kindergarten where we whisper things to the next person in their ear and it goes around a circle and comes out completely garbled, the idea of a bucket strategy has morphed from simply putting a little bit of your portfolio in cash to spend for the next year to something that is supposed to be an actual strategy involving multiple buckets and all sorts of complications. But that is the danger of relying on personal finance content providers who have dumbed things down too much for their own good. The ugly. Another example is something I heard on a podcast recently. This was Roger Whitney's Retirement Answer Man podcast. And I don't mean to pick on Roger in particular. It's just where this came up. He's a very useful resource and has a very nice podcast with lots of good information that I know lots of people find valuable. But anyway, he had somebody write in to ask a question about this strategy he calls the pie-cake strategy, where you're lining up five years of bonds and short-term assets and cash and so on and so forth to start off your retirement with. And the questioner said, isn't that going to cause problems with your overall portfolio because you're going to have so much cash in there, isn't that going to detract or degrade from your retirement portfolio overall? And I thought his answer was very interesting and telling because what he said was, well, we make adjustments to that on the back end and in most cases end up with something that looks like a 60/40 portfolio. And he said it very quietly, almost like he was trying to swallow the words. But to me that really illustrated what we are talking about here, that I would describe his approach as taking a 60/40 portfolio and then using management techniques to make sure you're covering your expenses, particularly in the early years. But he describes that as making something called a pie cake, where he's essentially just dividing up the asset classes into buckets or layers in the pie cake. And I can't help thinking that he does that for a reason, and the reason is it's a much more attractive presentation to his likely customers. But whether you called that a pie cake strategy or not, it's really a 60/40 portfolio with some management techniques added into it and does not change the overall performance over time of whatever that total portfolio is, regardless of how the pieces of it are labeled. So this is more about psychology and comfort, psychological comfort, than it is about portfolio construction. And you've observed the same thing with Wade Pfau and his Risa profile, which is really a psychological test to match people with portfolios or retirement plans that they are likely to be able to stick with. And even the use of the word style is a bit of marketing because really this is just a psychological preference is what we're talking about. That's what I'm talking about. has nothing to do with your fashion sense. Looks like a medieval warrior. So it ends up categorizing people in four boxes essentially, depending on how they answer the questions. One is called time segmentation, another one is called total return, another one is called risk wrap, and another one is called protected income. And depending on which box you end up in, that will suggest certain products and combinations of products to be presented to you.

Mostly Voices [24:59]

A guy don't walk on the lot lest he wants to buy.

Mostly Uncle Frank [25:03]

Unfortunately, I'm not sure that it actually captures what I would consider to be most important, which is not total return, but total ability to spend, as in maximizing a safe withdrawal rate. And by conflating those two ideas, I think they're missing something there. Overall, I think I would rather take a much more holistic and mathematically based approach than using personality profiles or labeling or management techniques as the primary basis for constructing a retirement or withdrawal strategy. And I talked about this in detail at that recent conference I made a presentation at. I'll just give you a few nuggets from that. I think the first thing that you need to do is evaluate your expenses, do an expense audit so you can project what your likely expenses are going to be, and then off of that gross amount, subtract all of the net incomes you expect to receive, whether that's pension, Social Security, rental properties, some kind of residual income or business income. or expected employment income. And that gives you a net expenses to be covered by your investments after you've done that simple calculation. Now, if all of those things actually cover your expenses, then you really don't need much of a withdrawal strategy and you could use your investments for whatever you choose because you're not relying on them to cover any of your expenses. But assuming you have expenses to be covered and they are significant, then you do need to be thinking about holistically what is a withdrawal strategy. And to me, there are three critical components of that. The first is what is your asset mix, your allocations, and as sub-questions that need to be dealt with or rules that need to be in place are your rebalancing rules, How often do you put that back to its original configuration and then reallocation rules in what circumstances or time frames would you change the asset mix that you're using? The next critical component is what is your base withdrawal rate? Is it 3%, 4%? Is it a range that needs to be decided upon? And then the third critical component is what are your withdrawal rate adjustment rules? Are you going to increase your withdrawals by some inflation rate? And if so, is it going to be the CPI or a personal inflation rate, for example, that you've calculated? Or are you going to vary your withdrawals based on the size of your portfolio? Or some other metric? Maybe you have a crystal ball which you believe predicts the future market fluctuations and you're going to use that for your withdrawals. A crystal ball can help you.

Mostly Voices [28:01]

It can guide you.

Mostly Uncle Frank [28:05]

But those are your three critical components. And if you can answer all of those questions in a comprehensive way, it does not need to be necessarily complicated, it does need to be comprehensive, you need to be able to answer all those questions, then you have a strategy. And that is a withdrawal strategy. That is the dog, if you will. Now let's talk about a lot of the tales that you see on these dogs, that people sometimes get confused with strategies, but these are actually not strategies. They're management techniques, they're window dressing, they're forms of mental accounting. Shirley, you can't be serious. I am serious. And don't call me Shirley. and what do we have in that category? The first one is your withdrawal mechanism, whether it's monthly, quarterly, or annually, and whether you're taking it out of a specific asset or taking it out of a cash pile. And the reason that is just a management strategy and not part of the withdrawal strategy is that it should be subsumed into whatever rebalancing strategy you have. So if your rebalancing strategy has you putting everything back to where it started with every year or so, then what happens every month or so is not going to matter that much because it's going to get swept away. The next one of these tales is asset labeling. Whether you put your assets in buckets, in pies, whatever other containers or labels you can devise to put on particular assets or groups of assets. That is not a part of a withdrawal strategy. That is a management technique at best and window dressing or mental accounting at worst. Because again, assuming you have a rebalancing strategy that is going to subsume or wipe out any of these manipulations that you do during the year. with these buckets or pies or whatever they are. Next one is mutual funds versus ETFs versus other forms of investing. Perhaps you're using individual stocks. Now that all feeds into calculating your asset allocation, but it does not change what the performance of the asset allocation is. Another one is bond ladders versus bond funds. Those are just management techniques. If you hold both of the same thing and they're containing the same bonds for a long enough period, it will equal out over time, even if it feels different while it's going on. Now that may complicate or change the way you handle your rebalancing or something else in your actual withdrawal strategy, but the fact that you hold bonds in a bond ladder or hold them in a bond fund is a tail. It is not going to affect the overall performance of your withdrawal strategy. Another one that's popular to debate these days is short-term asset choices, whether those are savings accounts or CDs or I bonds or short-term bond funds, money markets, whatever they are. They are all in the same class, and you can change them as often as you like, pretty much. But all that really matters is how much of your portfolio is devoted to that sort of thing, not which ones you are using in particular, because they all serve the same function, which is to be stable, not lose money, and hopefully generate some kind of income. And then another tail on the dog is investing for income versus total returns. Now, investing for income may cause you tax problems, depending on where you're putting those assets. But overall, it's not going to change the overall performance of your withdrawal strategy, whether your stock funds are paying dividends or not. As Larry Swedroe and many others have said in recent interviews, it is an irrelevancy these days as to whether your assets pay income or not, because it's the total return that matters. And since we live in the era of fractional shares and no fee trading, there is no negative consequence to just selling pieces of things whenever you need the money, as opposed to waiting for them to pay some kind of income or dividend. And so when I'm listening to people describing their withdrawal strategies, I'm always interested to be thinking in my mind, okay, is this part of the dog or is this just a tail on the dog? Who let the dogs out? Who let the dogs out? Who, who, who, who, who? Because I think the problems occur when you start letting these tails wag the dog. And that was essentially the question that was asked to Roger Whitney that I talked about. The questioner asked, isn't this tail of creating this pile of assets for my first five years of retirement going to mess with my dog, which is my overall retirement portfolio? And the answer was a tacit admission that it could very well have a problem or cause a problem, but that this was remedied by making sure that the overall portfolio was appropriate, either a 60/40 or some other construction that somebody would use in retirement. But now I feel like I've carried on about this far too long, and we have another email to get to. I want you to be nice. So we'll leave it at that, and thank you again for your email. Last off. Last off, we have an email from Jenzo.

Mostly Mary [34:02]

And Jenzo writes, hi, Uncle Frank and Aunt Mary. I'm working my way through your catalog and having a great time. Thank you for the entertainment and education. Hard to believe you only have 1,200 regular listeners. Don't be saucy with me, Bernaise. I count myself lucky to be among them. I have several questions. First off, I'm 35 and mostly in a Merriman style accumulation portfolio. But I would like to start to transition to a leveraged risk parity style portfolio over time. Here is my current portfolio：25% VTI, 25% AVUV, 25% VXUS, 25% AVDV. What I would like to work toward is 25% AVUV, 25% AVDV, 10% UPRO, 10% TNA, 15% TMF, 15% UGL. Doing an analysis of the above in portfolio charts with a manual average expense ratio of 0.50% yields a 15.9% real annual return since 1970 with an ulcer index of 8.2. The longest drawdown is about three years and deepest of 30 per cent last year, of course. Would you please provide some feedback on this portfolio? My fear is that I'm over optimizing to the past. Second off, how would you go about assessing the risk of the above portfolio? The theoretical risk return ratio of this portfolio is incredible, and it seems too good to be true that products exist in the age of steel that allow it to be easily constructed. Is the largest risk the fact that levered ETFs are a relatively new product, and could blow up in some future unknown scenario, I'm having trouble wrapping my head around how to assess the risk. Is the risk of a single levered fund, say UPRO, offset by other levered funds that are negatively correlated or uncorrelated, TMF UGL, or does the risk compound into greater risk? Last off, would you please comment on this video and the study mentioned in the video by Ben Felix regarding a new study that purports the new safe withdrawal rate to be 2.3%. Ben Felix uses a 2.7% number in his video. The fact that the USA has had an extremely good century is undeniable. However, it doesn't seem logical to base safe withdrawal rates on the absolute worst outcomes for every developed country. Please poke some large holes in the assumptions of this study so that I don't have to worry about it.

Mostly Voices [36:58]

I says, Pig Pen, this here's a rubber duck and I'm about to put the hammer down. Thanks, Jenzo.

Mostly Uncle Frank [37:05]

Well, Jenzo, you might be surprised that I only have about 1200 regular listeners, but I'm really not. This is a very nerdy podcast on an esoteric topic that most people are not that interested in. and it's laced with a lot of nonsense and goofing off.

Mostly Voices [37:23]

Talk Amara, do not implore him for compassion. Talk Amara, do not beg him for forgiveness. Talk Amara, do not ask him for mercy.

Mostly Uncle Frank [37:35]

That anyone who is trying to actually promote the thing to a large audience would tell me I had to get rid of. Let's face it, you can't talk Amara out of anything.

Mostly Voices [37:43]

But it does kind of guarantee that my audience is highly

Mostly Uncle Frank [37:47]

focused and well engaged with the content here. Top drawer, really top drawer. As we experience every episode with these questions, which are of a much higher quality and knowledge base than most of the questions that you might get on most personal finance podcasts. Yeah, baby, yeah! And so I thank you for them and your attention. Now getting to your questions. Your proposed portfolio looks interesting for a levered portfolio. I think the way to assess the risk is to do the best back testing you can using Portfolio Visualizer and Portfolio Charts, which allows you to add over 100 to your portfolio allocations. But leverage is going to add to the risk profile of something like this because even when things are uncorrelated over the long term, they can be positively correlated over short periods, which would lead you to a lot more volatility and higher standard deviations. I would refer you back to that first question and some of the links and other articles over at optimized portfolios, which go into a lot of these things and have a lot of risk reward analyses over there for various portfolios involving leveraged funds. But if you're going to hold something like this, you do have to commit to riding out the downturns and they're going to be painful. But just one comment on the proposed portfolio. I'm not sure I would use TNA in that portfolio. Simply because TNA is just all small caps, which includes half of small cap growth, which you actually really probably don't really want because you already have a lot of small cap value in those two small cap value funds that you've chosen. So I would probably reallocate 5% of what you have in TNA just to UPRO. to balance out your large and small cap, and then you could use that other five percent, however you want, really, maybe adding to the bonds or the gold, or maybe getting some managed futures into this thing somewhere. But it seems like a lot of my listeners are coming up with some very interesting constructions, and if you listen to the podcast, you'll probably be hearing more of them in the future. Check out some of Alexei's which we've talked about in the past. The dude of Biden. And ah, now getting to this video and this academic paper purporting to say that a safe withdrawal rate would be 2.3% or 2.7% if you considered all the worst cases of all the countries where data was available since something like 1850. What comes to mind for me is a couple of quotes from the Princess Bride. I do not think it means what you think it means. And this study, I don't think really means what people think it means, even the authors. Inconceivable. Because to me it does not mean that your safe withdrawal rate is less than 3% or you should be using that as a figure. What it means is that blindly picking a 60/40 portfolio from some random country with random currencies and a random bond market is a really bad idea.

Mostly Voices [41:33]

What you just said is one of the most insanely idiotic things I have ever heard.

Mostly Uncle Frank [41:42]

So ask yourself if you lived in, say, Turkey or Argentina today, Would you put 40% of your assets in the bond markets of those countries?

Mostly Voices [41:53]

Are you stupid or something? Of course you wouldn't. Stupid is as stupid does, sir.

Mostly Uncle Frank [42:00]

And you would not have done that in the past, if you had a choice, if you were in post-World War I Germany or Austria or Hungary, or in any number of other countries with severe economic problems, related to wars or other political events. What this article, I think, is actually telling us is that we should only be buying bonds in currencies that are used as world reserve currencies. And we should not be buying bonds in any country where they are floating their own bonds in somebody else's currency. So if you go around the world, you will find that most countries that are not the US or one of the big European countries or Great Britain or Japan have difficulty floating bonds in their own currencies, and so they float them in dollars or euro or something else. That should tell you that owning bonds denominated in those countries' currencies is not a good idea, and it's certainly not something you would devote 40% of your portfolio to. Those are speculative instruments, and nobody should be using them in a retirement portfolio. They are for bond traders, not for people trying to live off their portfolios. So if the hypothetical people in this study, in whatever country they were in, instead only held bonds in British pounds when that was the global reserve currency or in US dollars when that became the world's reserve currency. They would not have had any of these problems. In fact, their portfolios would have survived very well when the currencies in their own countries went belly up. What else is this study actually telling you? I'm saying stupid is as stupid does. This is like the Sherlock Holmes story about the dog that didn't bark.

Mostly Voices [44:02]

The question is, who let the dogs out? What is the dog that's not barking here?

Mostly Uncle Frank [44:09]

It's assets that are not stocks or bonds. What if instead of using these goofy portfolios that are 40% in very speculative debt instruments, people would have held gold in their portfolio? In many of these historical situations, that would have been the magic bullet. That's what would have kept your portfolio surviving some of these hyperinflationary and wartime episodes. So what this study is telling me is not that our safe withdrawal rates are less than 3%. What it is telling me is that you should not put speculative assets particularly debt instruments into your portfolio, and that you need to be more diversified than just holding a pile of stocks and a pile of bonds. And if you do something like that, you're going to have vastly improved outcomes. So to me, the whole point or conclusion you should draw from that article is that you need better diversification than what people commonly talk about, and that it needs to be done in an intelligent way. So, no, I don't think you should worry about that study. In fact, you should take it as evidence that having a risk parity style portfolio or something that is much more diversified from standard constructions is something you really ought to do.

Mostly Voices [45:36]

Rubber duck just soft buster, come on there, you got 10-4 soft buster, listen, you want to put that micro buster in behind that Suicide jockey? Yeah, he's home dynamite and he needs all the help he can get.

Mostly Uncle Frank [45:49]

Because it may be saving your bacon at some point. Unfortunately, most of the commentary about that paper, particularly in the financial media, just exhibited a complete lack of critical thinking about really what was going on there and really digging into what they were analyzing. Instead of just grabbing at attractive headlines, which is unfortunately what most people did with that. But there is no reason you need to be one of those people. And thank you for that email. I says, Pigpen, this here's a rubber dube. We just ain't gonna pay no toll. So we crashed the gate doing 98. I says, Let them truckers roll 10-4. 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.

Mostly Voices [47:35]

This is Frank Vasquez with Risk Parity Radio signing well, they ought to know what to do with them Hogs out there for sure. Well, Mercy Sakes, good buddy, we gonna back on out here, so keep the bugs off your glass and the Bears off your field. We'll catch you on the flip-flop.

Mostly Mary [47:45]

This here's rubber duck on the side. We gone? Bye-bye the risk parody 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.