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 [0:37]

Thank you, Mary, and welcome to Risk Parity Radio. If you are new here and wonder what we are talking about, you may wish to go back and listen to some of the foundational episodes for this program. Yeah, baby, yeah! And the basic foundational episodes are episodes 1, 3, 5, 7, and 9. Some of our listeners, including Karen and Chris, have identified additional episodes that you may consider foundational. And those are episodes 12, 14, 16, 19, 21, 56, 82, and 184. And you probably should check those out too because we have the the finest podcast audience available. Top drawer, really top drawer, along with a host named after a hot dog.

Mostly Voices [1:35]

Lighten up, Francis. But now onward, episode 255.

Mostly Uncle Frank [1:41]

Today on Risk Parity Radio, we're just going to do what we seem to do best here, which is go through our Everlasting stack of emails.

Mostly Voices [1:54]

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

Mostly Uncle Frank [1:59]

And first off, we have an email from Javier. And Javier writes, hi, Frank.

Mostly Mary [2:08]

Thanks for the great podcast, the serious and the fun parts. But I'm funny how? I mean, funny like I'm a clown. I amuse you. I'm still in the accumulation stage 12 to 15 years to go, and after being self-employed for most of my life, I now have access to a 401. I'm contributing all the pre-tax money allowed by the IRS and currently invest 100% in US equities. My 401 investment options are very limited, and I currently only invest in mutual funds based on the S&P 500, S&P 400, and the Russell 2000. I also have access to an MSCI ACWI ex US Index, a US AGG Bond Index, a Short Term and TIPS indexes. Would you stay the course or would you incorporate bonds to this portfolio and how much? Thanks again and please continue sharing your wisdom.

Mostly Uncle Frank [3:13]

Well, first off, sorry I didn't get to this last time. In the last episode, I answered an email from you and had this one together with it, and I lost the piece of paper.

Mostly Voices [3:23]

That's not an improvement. But now I have it again. I think I've improved on your methods a bit, too. I employed some Kiara Scurro shading. And getting to your questions.

Mostly Uncle Frank [3:34]

So it's a little hard for me to answer this question because I don't know what else you have. So I have to assume for the purpose of the question that all of your money is in this. 401k and that you don't have any other investments. If that is the case and you are in fact many years from becoming financially independent, then yes, you could still go with 100% in US equities so long as you have the stomach for it because you cannot bail out when things are not going well. And in fact, when things are not going well, that is the time to keep pushing in. Yes! Because downturns in your accumulation phase actually allow you to accumulate more money than you would have otherwise. That's the fact, Jack! That's the fact, Jack!

Mostly Voices [4:22]

Now as for your choices in the 401k,

Mostly Uncle Frank [4:25]

you are correct that they do appear to be limited. Hopefully they are low fee. And here is the issue with this and it goes to what we call the macro allocation principle. Which if you go back to our early episodes, we talk about this, but it comes from considering what's in Jack Bogle's Common Sense Investing in chapters 18 and 19, which is that portfolios with the same macro allocations perform very similarly, especially over shorter periods of time. And 10 to 20 years is a shorter period of time in this. So what that means is that just about any combination of these equity funds that you have in S&P 500, A mid-cap and a Russell and even the international one. Just about any combination of those that's 100% equities is going to perform likely very similarly to any other combination in the time period you're talking about. And you really won't know which was the best combination until after the fact. The one thing you do have to do is stick with whatever you're sticking with and not be jumping back and forth. with these funds based on which one is performing better at a particular time, because that's actually how amateur investors underperform the market. They keep chasing what's performed the best in the last one, five or 10 years. And then usually it is not the best performer in the next one, five or 10 years.

Mostly Voices [5:55]

That's not how it works. That's not how any of this works.

Mostly Uncle Frank [5:59]

So you want to be consistent with that. But I think what you really want to do to get yourself some flexibility is probably open an IRA, whether it's a Roth or a traditional IRA outside of this 401k. And so unless you are getting a match for all of the money you put in the 401k, in which case it's a no-brainer to stick with the 401k, it would be better to carve off enough to fill up an IRA, what is it, $6,500 this year? and if you couldn't do it in both places, instead of putting that money into the 401k, put it into the IRA. And you can open an IRA at Fidelity or Schwab or Vanguard, and that would be fine. But once you have an IRA, then you can invest in whatever you want and you're not stuck with these choices in this 401k. So you could, for example, put it in a small cap value fund and combining that with the S&P 500 fund would be one of your best bets for a simple portfolio that's likely to do well. Now, I don't know if you qualify for a Roth, but you also want to open a Roth for a different reason, which is this weird five year rule about having your Roth open at least one Roth open for at least five years before you can access it. And those rules are very confusing because there's more than one five year rule, which I won't really get into now. Just trust me, it's advantageous to have a Roth in existence five years before you're likely to start using it. And if you can just throw in even a small amount of money now, that counts for having opened a Roth IRA, even if you just threw a hundred bucks in there. And you can split your contributions in any given year between a Roth IRA and a traditional IRA, as long as it doesn't go over the limit. Now, your other question, which I only indirectly answered, which was, would you incorporate bonds to this portfolio and how much? And my answer would be probably not right now if you can still stomach the 100% equity allocation. I would probably start considering that once your accumulation has reached half of your F.I. number or what you think you need to accumulate. Because that's a good place to start thinking about, well, how long am I going to keep working and accumulating? Because if that's a shorter period of time, then you need to start thinking about transitioning to a decumulation portfolio. It's hard to say much more about that because I'm not sure about your complete situation as to things like how old you are, whether you need to ladder to convert some of this stuff to a Roth at some point, What other assets you've accumulated and so on and so forth. And all of that would play into these decisions that I've been talking about. So hopefully that helps and thank you for that email.

Mostly Mary [9:00]

Second off, I have an email from Adam. And Adam writes, hi Frank, I was curious to hear your thoughts on the Scott Cedarberg paper titled Is the United States a Lucky Survivor? A Hierarchical Bayesian Approach Circulating Lately. It seems to suggest that the safe withdrawal rates determined from U.S. historical data may be disproportionately high due to significant survivorship bias. This casts doubt that the U.S. historical data is a reliable crystal ball use as a model for what to expect in the future for portfolios consisting of US only investments. Professor Scott Cederberg was a guest on the Rational Reminder a while back covering the subject, and David Stein also talked about the subject on a recent episode of Money for the Rest of Us titled Beware of Survivorship Bias When Investing. Ben Felix also posted a YouTube video titled the 2.7% Rule for Retirement Spending. I am sure you are probably aware of these recent discussions and episodes, but I was curious if you could share your thoughts on the subject.

Mostly Voices [10:13]

I says, Pigpen, this here's a rubber duck and I'm about to put the hammer down.

Mostly Mary [10:21]

My immediate thought was that social security should significantly help portfolio survival and withdrawal rates and that a flexible or variable withdrawal strategy should significantly improve portfolio survivorship as well. People are adaptable, too, so I don't think investors would just blindly spend down their entire portfolio as it kept falling and falling at a level worse than the current sample of U.S. historical data. You're gonna end up eating a steady diet of government cheese and living in a van down by the river. In addition, the Cedarberg paper does not reflect a portfolio combining common risk parity portfolio ingredients such as combining stocks with long-term treasuries, mixing large growth with small value, etc. I know you have talked about international stocks not being too desirable due to the high correlation to US stocks, particularly in recent decades, which I have also seen manifest on Portfolio Visualizer. I do wonder though, if this is just another small sample size crystal ball and that maybe this high correlation could break for some unforeseen reason in the future, making it a good idea to at least have a portion of the equity side of the equation invested internationally, such as mixing in AVDV with AVUV if small cap value is a portion of the portfolio, even though there is a high correlation currently with US stocks. Sorry if my message sounds a little jumbled. Mary Mary, why you buggin'? But I am curious on your thoughts on the matter. For now, I am sticking to my portfolio of 50% US stocks, 35% long-term treasuries, and 15% gold.

Mostly Voices [12:07]

I love gold.

Mostly Uncle Frank [12:11]

Well, Adam, we just talked about this in episode 251. I probably should have combined your email with that one.

Mostly Voices [12:19]

Looks like I picked the wrong week to quit amphetamines.

Mostly Uncle Frank [12:22]

And I don't want to repeat everything I just said there.

Mostly Voices [12:27]

For mercy's sake, looks like we've got us a convoy.

Mostly Uncle Frank [12:30]

But the upshot is this, the portfolios being analyzed there were just not good portfolios to begin with. And the researchers essentially used a method of false equivalence equating in particular bonds issued in strong currencies in places with strong bond markets with bonds issued in places with weak currencies and weak bond markets. You really can't and should not be comparing those two things. Those are not apples to apples. Those are apples and oranges. Or as I learned, apples and pears is what you would say in Northern Europe. I was excited. Because when the expression came around, they didn't have oranges yet. But anyway, the main problem with the portfolios Besides not being very well diversified and not having things like gold in them, which you would certainly be holding if you were in some country with weak markets, particularly a weak currency market, which is one of the reasons this was so popular throughout the ages among wealthy people in agrarian societies in particular.

Mostly Voices [13:40]

It's good to be the king.

Mostly Uncle Frank [13:44]

What they probably should have been doing is assuming that the 40% in bonds was invested in the largest bond markets in the world, which would have been the one with the world's reserve currency at the time, either the United Kingdom or the United States, as the case may be. Because at least that would have been a reasonable choice for somebody to make. It's not a reasonable choice for somebody in, say, Turkey or Ukraine or Argentina today to be investing in their local bond markets. And in fact, most bond markets in most countries, when you think about it, are speculative investments from an investment perspective and should only be invested in by professionals. If you want a litmus test to see whether a country's bond market is speculative or not, look and see how they float their sovereign debt. Because countries like that cannot and do not float most of their sovereign debt in their own currencies. They have to float it in dollars, they have to float it in euro, they have to float it in pounds, and that's so they can get access to capital markets and people actually buy their bonds. And to me, this is kind of an example of what goes on a lot in finance, that people don't want to criticize each other. And while I love the guys at Rational Reminder, sometimes they do not use critical thinking when they're looking at some of these studies. They just say, well, it's an academic and they look famous and important, therefore we should just believe them without thinking about what this really means and what they're doing. And academics are notorious for coming up with ideas that are interesting from an academic perspective, which is what this paper is, but not very useful or applicable from a real world or practical perspective, or in this case just illustrating what you should not be doing, which is holding 60-40 portfolios in countries with speculative bond markets. So when you're reading an academic paper and thinking about what it means, you really need to consider, is this something that somebody would actually do or is recommended that somebody would actually do? in the real world as a practical matter today. And if it isn't, you can take interest in the topic, but it really belongs on the shelf and not on the desk where you're planning your portfolio. The one thing it does tell you, though, is that you really need to be thinking of a more diversified portfolio for your drawdown phase than something that is basically just a 60 40 two asset portfolio.

Mostly Voices [16:29]

Am I right or am I right or am I right? Right, right, right.

Mostly Uncle Frank [16:34]

Not because that's a terrible place to start, but just because it's a lot easier to do a lot better these days. And so we should know better. Hello. Hello. Anybody home? Think McFly, think. As I've said recently, we should not be driving around with cars that have carburetors and drum brakes in the 2020s. Get off my lawn. And instead should be using what we've hopefully learned in the past 30 years or so since Bill Bengen wrote the first paper about safe withdrawal rates, that you can do a lot better than what he was working with back then. And even he says so, he said so last week. He said he can get up to 4.8% with a reasonably diversified portfolio that does not even include gold. And that was his appearance on the Money with Katie show if you're looking for that. But anyway, now I'm starting to just repeat myself. You are talking about the nonsensical ravings of a lunatic mind. But hopefully that helps and thank you for your email. I says, Pink Pen, this here's a rubber dub. We just ain't gonna pay no toll. So we crashed the gate doing 98. I says, Let them truckers roll 10 foot. Last off. Last off, we have two emails from Jeff, which we'll do together. And in the first email, Jeff writes, Frank, I love your show and I'm learning a lot.

Mostly Mary [18:06]

My question is about leveraged funds. I listen a lot to Corey Hoffstein and the team at Resolve Asset Management, and much of that has to do with return stacking. This sounds great in theory, but I know there are funds, for instance, that rebalance daily, and those are not meant for long term but short term trading. One problem is telling which funds are which. Can I really expect a levered 150% fund to track closely to the underlying position over longer periods? I know they can use leverage, but there is a cost for that. Do they just compensate with more leverage? I do own RSBT, as I thought it would be a great way to get both bonds and managed futures. I'm also interested in products like NSTX and UPAR. In my 401, I have a few options for PIMCO Stocks Plus Funds. I just need more unbiased information on this subject. Thanks in advance for any insight you can provide me. And in the second email, Jeff writes, Do you have any information or shows relating to PIMCO Stocks Plus Fund as they are offered in my 401? I would like to know what kind of return over, say, the S&P 500 these funds provide, typical duration, et cetera.

Mostly Uncle Frank [19:25]

All right, let's start talking about your questions about leverage first. Now, we talked a lot about Corey Hoffstein just in episode 252 recently, and he's done a lot of work on what he calls return stacking, which involves a risk parity adjacent kind of portfolio. that is levered up and involves managed futures. Groovy, baby! And he and others are actually working on creating funds like the one that you mentioned, RSBT, that incorporate various assets that might be used, at least in part, to create these kinds of portfolios. Now, the idea of using leverage in a portfolio, particularly an accumulation portfolio, is an old one and most recently was discussed a couple years ago in the Rational Reminder podcast where they were talking about how it might be used in the academic research behind using leverage in an accumulation portfolio. The main problem with the idea is that at least in days of yore, it was extremely difficult to do because you either had to take margin or use some kind of option strategy. These days, there are more and more funds being developed that have leverage incorporated into them. And sort of the first wave of those ETFs were the ones that came out around 2009, which included UPRO and TMF, and these were designed more specifically for trading as three times leverage portfolios. Much more recently, we are seeing portfolios constructed that are designed for longer term holdings, like RSBT that you mentioned, which I believe is bonds and managed futures, as you also mentioned. There's NTSS, which you mentioned, and we've talked about all the way back in episodes 59 and 61 and since then. And then UPAR is a relatively new Risk Parity Portfolio that is levered up, I believe, about 1.7 to 1. Now, how well a particular fund is going to track its indexes, a leveraged fund is going to track its indexes, does depend a lot on the nature of its construction. The ones that seem to do the best at that are often based on swaps contracts with banks. which can be set on a contractual basis. If an index goes up, one side pays the other. If it goes down, the other side pays the other. Or also with very long-term options and futures contracts, often known as LEAPS. It's the funds that are constructed with short-term contracts that have the most trouble tracking their indices. A lot of those involve commodities and they're rolling over futures or options contracts, options on futures contracts. and that can be very dicey and does have a serious decay problem when you hold them long term. So I'm optimistic some of these newer funds are going to be able to solve this problem or at least be viable options. The main trouble I have with them so far is they're just so new. So they don't have 10-year histories and some of them only have less than two-year histories. And so until you see a fund kind of go through a complete economic cycle, It's a little bit difficult to say too much about it other than it looks like a good idea. But this is another reason it's a good era to be a do-it-yourself investor because you're getting more good options for these kinds of strategies from serious people who are really trying to construct things that are going to be useful and efficient for creating diversified portfolios with leverage in them. But if you go to the podcast page at the website or just bring up the RSS feed, which you can also find there, you can search for the word leverage and find it in many, many podcasts and listen to them because we have talked about this a lot over the past two and a half years, getting close to three. Now getting your second question, you're talking about these PIMCO Stocks Plus funds that are offered in your 401k. Well, there's a whole little family of funds they've got there. Don't ever take sides with anyone against the family again. So I wasn't sure which ones that you had, but at least the sort of main institutional ones seemed to follow the S&P 500 fairly closely. So it looks like what's going on there is they're doing something a little bit more complicated to get a higher fee, but they're keeping the fee and you're getting about the same performance as the S&P 500. At least that's what looking at them on the Morningstar analyzer told me. Am I right or am I right? Am I right? Am I right? Am I right? And I will link to that in the show notes. You can take your fund and put it into Morningstar and it has a lot of analysis that it will spit out at you for free. I don't really have too much to say about them other than they're probably fine as a core holding like an S&P 500 fund in your 401k if that's what's available. And for diversification purposes with other things, I probably would treat those basic ones as an S&P 500 fund. With one caveat that I'm not sure exactly which ones you're talking about because seemed like there was at least five or six different ones, and some of them were just bond funds.

Mostly Voices [25:11]

Do you expect me to talk?

Mostly Uncle Frank [25:15]

Which you probably do not need an accumulation. No, Mr.

Mostly Voices [25:19]

Bond, I expect you to die.

Mostly Uncle Frank [25:22]

But anyway, hopefully that helps a little bit. And thank you for your email. And now I see our signal is beginning to fade.

Mostly Voices [25:30]

I can't wait to start poing through my garbage like some starving raccoon.

Mostly Uncle Frank [25:38]

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 or review. That would be great. Mmmkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off. Shut up and take my money.

Mostly Voices [26:15]

Release the hounds.

Mostly Mary [26:19]

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.