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. There are basically two kinds of people that like to hang out in this little dive bar.

Mostly Uncle Frank [0:48]

You see in this world, there's two kinds of people, my friend.

Mostly Voices [0:52]

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 Multi-million 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. What we do is if we need that extra push over the cliff, you know what we do? Put it up to 11. Exactly. But whomever you are, you are welcome here. I have a feeling we're not in Kansas anymore. But now onward, episode 265. Today on Risk Parity Radio, we'll just do what we seem to do best here, which is tackle your emails. Looks like I picked the wrong weight to quit sniffing glue.

Mostly Uncle Frank [2:26]

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

Mostly Voices [2:30]

And first off, first off, we have an email from George. Gee, George, you're real smart, aren't you, George? Yeah, yeah, real smart. And George writes, Hi, Frank.

Mostly Mary [2:45]

Short and sweet to preserve Mary's mellifluous voice.

Mostly Voices [2:50]

I have been holding the 6% cash allocation in SHY,

Mostly Mary [2:55]

short duration bond ETF, instead of cash savings because it has been yielding about 1% more than my online accounts, although there is the duration risk of the bonds to consider in light of rising interest rates. I believe that the Fed will be raising interest rates again, and I have noticed recently that money market funds are yielding within a few tenths of a percent of SHY with lower duration risk. When rates were much lower, a 50-basis-point difference was significant. Now it is much less of a difference. Your elucidation of the difference in tax implications, along with your recommendation in this and future regimes, would be appreciated. Enjoying retirement and the low maintenance golden ratio portfolio.

Mostly Voices [3:40]

Yeah, baby, yeah! Blessings, George. I will name him George, and I will hug him and pet him and squeeze him. Well, first off, George has moved to the front of the email line because he is one of our patrons on Patreon who has helped us support our charity, the Father McKenna Center. Yes! And I will not belabor that this episode since I just talked about it in the last episode. But if you want to go to the front of the line, go to the support page and donate. Let's do it. Let's do it! Now, get to your question. I think your email suggests a short general discussion about short-term assets in general. Because I think people often make these more complicated than they necessarily need to be and get too hung up on rigidity when there is a lot of flexibility when it comes to your short-term assets and you should feel free to take advantage of it. So in every portfolio, at least in any retirement portfolio, there is going to be some portion of that portfolio devoted towards short-term assets. And what I'm including there is everything that you would think of as short-term. So short-term bonds, one to three years, like SHY, that's probably the longest asset you'll have in there besides maybe I bonds, which could also be included in there. This would also include money markets, savings accounts, CDs, Megas, that's a CD-like form of annuity. Spelled M-Y-G-A or any kind of T-Bill or short-term bond that you are effectively holding to maturity. Now what are the rules of thumb that we might apply to these generally? The first one is, is don't hold too many of them unless you are intentionally holding some kind of really conservative portfolio because you have short-term liabilities to cover, so on and so forth. But in terms of portfolio construction, if these kind of assets exceed about 10% of your portfolio, particularly on the shortest end, it will tend to degrade or reduce the overall performance, long-term performance of your portfolio in terms of both its compounded annual growth rate and its safe withdrawal rate. the second rule of thumb, which is what we'll talk about here, is that these can be very flexible and you can change them whenever it seems appropriate or move them around whenever it seems appropriate. And that's because they are there mostly in terms of the portfolio for stability and whatever income they earn is just gravy. Don't be saucy with me, Bernaise. So if you see one of them that is yielding significantly more than another one, a similar duration, feel free to sell the one and buy the other one because you're not going to have many capital gains issues going on here. Most of these things do not have any capital gains associated with them at all, which means they can generally be bought and sold without any tax consequences. Which leads to the next consideration, which is what are the tax consequences? Fire and brimstone coming down from the sky. Now when interest rates were really, really low for short-term debt, there weren't any, these were yielding close to 0%, now that they are yielding 4 and 5% these days, there are going to be some tax consequences to the extent you're holding them in taxable accounts. Now how important should this be to you? Well that depends on your marginal tax rate, obviously if you're in a 12% tax bracket, this isn't going to matter that much. If you're in a 30 plus percent tax bracket, it's going to matter a whole lot more. And the tax characteristics of these things are different in different ways depending on when they pay their income and then the form of the income because, for example, some of these short-term debt instruments are like US Treasury bonds and those are not subject to US state taxes, although they're subject to federal taxes. So if you live in a high tax state, that might be of use to you. Similarly, you might be also looking at short-term municipal bonds for some of this holding because they don't generate any taxes. But those are mostly considerations for the people in the highest tax brackets. What's a general consideration for everyone who has both taxable brokerage accounts and retirement accounts is that when you have these rates that are much higher than they used to be, it may be a good idea, depending on how much room you have in them, to move some of these short-term payers into those IRAs, particularly the traditional IRAs. Because if you're not actually using the money anytime soon, you may be better off putting that in a tax-deferred account and then putting something else say some other stock fund into your ordinary brokerage allocation. Now, all of this is going to be different for each person depending on how much they have in their ordinary brokerage side versus their traditional IRAs and 401ks and Roths, et cetera. But it is something to look at and it is something that has changed in the past year given where interest rates were on these to where they are now. It used to be a trivial concern, now it's a meaningful concern. And it will probably stay that way until the Fed decides to reduce rates again to where they used to be, which may or may not occur in the near future. We don't know. What do we know? You don't know. I don't know. Nobody knows. So that's my general recommendation. Look at your overall tax situation and what you're holding and if it's in a taxable account. and you're not actually going to use it other than for rebalancing purposes, it's probably a good idea to swap that into a traditional IRA or 401k and then buy something different in the taxable account, say a stock fund or even gold at this stage of the game. And the reason I mention that at this particular juncture is that gold has had a good run, it's near an all-time high, it does not pay an income, so if you're holding it in a Taxable account, there's probably a better than even chance that it's going to show a loss in the next period because that's the way things go. They go up and down. Surely you can't be serious. I am serious. And don't call me Shirley. And in that case, maybe you can do some tax loss harvesting with it. In any event, you won't be paying any additional taxes on that as opposed to holding, say, SHY or a money market in your taxable side of things. In general, what I see amateurs doing is fixating too much on their short-term investments and neglecting to diversify sufficiently their long-term investments. But I don't think you have that problem if you've been following some of our suggestions here for ameliorating that issue. I'll drive that tanker. Hopefully that helps and thank you for your email. I'm sorry, George. George is my friend. Hey, Benny, you like Mexican food? Oh, yes, I do, George. It gives me the heartburn and I love it. Second off, I have an email from Danny. And I think I may know this Danny. If memory serves me, he was either a member of the military or the village people. Either way, we got you covered. And Danny writes, hi Frank, hi Mary.

Mostly Mary [11:50]

Question of perspective. When it comes to calculating predicted annual expenses for retirement, like keep the lights on number, I have two approaches.

Mostly Uncle Frank [12:01]

You see in this world there's two kinds of people, my friend.

Mostly Mary [12:06]

My first method is to tally up all the outflows slash expenses for the year. It is a bit tedious. My second method is to tally up all the investments slash savings for the year and subtract that from my annual income. The thought being that if I did not definitively invest it, I assume it to be spent. They should come out reasonably close, but I always come up with a lower number with the first method, about 5% lower. I prefer the second method. It has fewer moving parts. It is much easier to handle. It also makes me plan towards a higher slash safer goal. I think of it as an example of inverting the question. Do you see any flaws in taking the second method approach? Can I get a ruling here, Judge? Thanks, Danny. What are we doing here? We gotta go in and visit the fang.

Mostly Voices [12:59]

No way. Well, my first reaction is, well, here's a young man that seems to know what he's doing. Nice to see you. Please have a seat. So, no, I don't really see any particular flaws with the second approach of simply taking the gross income and subtracting off the savings, particularly if you are in the accumulation phase. Five grand, no problem. We'll have it for you in the morning. And that is more or less what we did when we were accumulating. I will not take your filthy stolen money. So as we like to say here, you are correct, sir, yes. But now here are the reasons that it can be useful to do this from a bottom-up approach. We are adding up the individual expenses over time. I beg your pardon, what did you say? The main reason to do that for planning purposes is to be able to distinguish what I call your keep the lights on expenses, from what I call your comfort expenses and your extravagances. It's popular now to call these things mandatory expenses and discretionary expenses. Who wants an orange whip? Orange whip? Orange whip? Three orange whips! Or the more flowery marketing term minimum dignity floor for mandatory expenses. Top drawer, really top drawer. But this is helpful when you're Getting to your drawing down phase when you're actually living on the money and you don't have any other income or any other significant income, which may or may not apply to you. We're on a mission from God. And when you get there, you do have to match up your assets with your liabilities. So typically the process goes, let's look at all our expenses for the next month or period. We'll just use a month in this circumstance for exemplary purposes. Really top drawer. First you would take those monthly expenses and then subtract off any monthly income you might be getting from Social Security, pensions or any other source of that nature. And then you have your expenses that need to be covered by your portfolio. Four fried chickens and a Coke and some dry white toast. Now let's assume just for the moment that you don't have any other income. So we're just looking at the portfolio to cover all of your expenses. The tall one wants white bread, toast, dry, with nothing on it. And the other one wants four whole fried chickens and a coke. A kind of rule of thumb I like to use for that is that you'll keep the lights on or mandatory expenses. Toasted white bread, please. Should be somewhere around 3% or less of your portfolio, or at least your portfolio from the starting gate. And then you can add on that your comfort expenses as another potential 1%. Four fried chickens and a coke. And then extravagances as another potential 1%. Three orange whips. And by comfort, I mean things like eating out, paying other people to clean the house, do your lawn work, fancy gym membership. Four fried chickens and a Coke. All that stuff that is nice to have, but in a pinch you could do without it. And then by extravagances, I mean things like big trips or large purchases that are discretionary. Three orange whips. Those cigar boats named YOLO or perhaps Nolo Contendere. Not gonna do it. Wouldn't be prudent at this juncture. so that is really why you want to do some bottom up calculations so you can figure out and categorize your expenses like this. It's got a cop motor, a 440 cubic inch plant. It's got cop tires, cop suspension, cop shocks. Because when you get to withdrawing, you're not actually going to be withdrawing at some fixed percentage and spending the money just because you have this plan for withdrawals on fixed percentages. What you're actually going to do is make withdrawals that match your expenses across time. Now, that being said, you can actually save a lot of work here because the purpose of this is not to get to exact dollar and cent figures. You don't want to let the perfect be the enemy of the good here. The purpose of this is to figure out what these things are broadly. Because the truth is most Americans do not have any idea what they spend over the course of a month or a year. And because they don't, you can't really do any financial planning at all. That's not how any of this works. So when Mary and I moved into mostly retired mode a few years ago, we started tracking our expenses every month. 'Cause we had a general idea of what they were, but not the specifics. And we did want to see both what they were in various categories and then whether they were increasing or decreasing over time. Fortunately, they've been decreasing, mostly 'cause we've been kicking these kids out slowly but surely. You're not going to amount to jack squat. But we also found that it was not worthwhile to track small expenses, say $25 or less, because that was like a third of the entries in a monthly sheet and we could just estimate those. And so we just stopped doing that. I don't think I'd like another job. So our budgets are never exact, but they are close enough for tracking purposes and that's all you really need. The danger of trying to be too precise is the one you've identified, that it's just too much work. And if it's too much work, you probably won't do any of it. And so it needs to be not too much work before it can be useful and sustainable. As we like to say, perhaps sometimes inappropriately, there are many ways to skin this cat. But thank you for your email. Get out and don't come back until you've redeemed yourselves. Just a note on your email. I thought there were two emails from you, but I cannot find the other one and I'm not sure whether it's because the website seems to swallow up the messages sometimes and then re-spit them out at other times, or more likely that I don't really know what I'm doing. I award you no points, and may God have mercy on your soul. But if you sent a second email, if you would please resend it, and perhaps to the website frank@riskparityraider.com, I will make sure that I get to it, despite my infirmities. They want you, they want you, they want you as a new reader. Oh, me! They want you, they want you, they want you. Now moving forward. Last off. Last off, we have an email from Jamie and Jamie writes.

Mostly Mary [20:59]

Hi, Frank. What do you think of QM HNX as a substitute for DBMF? The one issue is that it's a mutual fund. But some basic back testing suggests it might be a better performer in my risk parity portfolio. Also, given what AQR does, are there other funds they sell that might be worth considering? Thanks, Jamie.

Mostly Voices [21:26]

A very interesting question indeed. Since before your sun burned hot in space and before your race was born, I have awaited A question. Well, I took a quick look at QMHNX and I will link to that page in the show notes. It is basically an AQR fund that invests in managed futures. However, it does not seem to be a typical managed futures fund in that typical managed futures funds are generally trend following. Not all of them are, but they typically are, and that is what they're known for. QMH and X, like a lot of AQR products, is much more advanced and is doing some kinds of long short strategies and other things that are manager dependent. And that can be both good and bad. And there's actually a debate now raging in the managed futures or CTA communities. as to whether it is preferable to use managed products to invest in this area or to use a replicator like DBMF, which is the new kid on the block, and it's essentially the closest thing you have to an index fund in that space. There was just a nice episode of the podcast, Top Traders Unplugged, which is all about this area of investing. where they had the person that runs DBMF, Andrew Beer, have a debate or other discussion with somebody who's on the managed side of these things. The way I approach this or like to approach these questions is to look at what the professionals do and then decide whether that's appropriate for a do-it-yourself investor to copy, whether it's implementable on a do-it-yourself investor level. And what professionals do, I'm talking about pension funds and big funds that are devoting a portion of their investments to managed futures or some other alternative investment or specialized investment, is they actually have a vetting process for all of these kinds of fund managers or asset managers. and they go through and choose the ones they think are the best or more most appropriate for their pension fund or whatever they're managing overall. We're talking institutional level stuff. Real wrath of God type stuff. So I know that, for example, in Fairfax County where I live in Virginia, there is a very large pension fund that serves police officers and firefighters and teachers that invest on a risk parity style approach. And as part of that, they will go and interview these managers to decide which ones they want to go with for whatever period they're talking about investing. And it's usually a period of years that they will run with somebody. Now, I think that's a fine approach to take, but it does require expertise. And it does require a lot of time and it does require a lot of information. So for most do-it-yourself investors, this is not something that is implementable at a do-it-yourself investor level. Man's got to know his limitations. What we as do-it-yourself investors are more looking for are index funds or index fund like products. These go to 11. That have relatively low fees. but cover a particular asset class or kind of investment. No more flying solo. Now that does not mean that some do-it-yourself investors could not do the work to become educated enough to make decisions about managed funds as to which one is likely to be better than another one. I think I've improved on your methods a bit too. But for most of us, it's probably not worth our time. Time is money, boy! And particularly when we're talking about only a small part of a portfolio like this would likely occupy. It is probably really not worth our time to be trying to evaluate different managed futures funds when we have a product now available like DBMF, which is replicating essentially the average of what all of the fund managers who participate in what is called the SocGen Index of CTAs, that's Societe Generale, the French bank. And because DBMF is seeking to essentially get an average performance, by definition, about half of the managed funds are going to be better than that and half are going to be worse than that. most of the time if their replication efforts work most of the time. So that's why I think something like DBM is a better choice for most do-it-yourself investors. And I think there'll be more products like that coming out. I know Simplify Funds has come out with a similar ETF called CTA that they are running with. And I would expect there'll be others in the future. That being said, AQR is one of the best in the business and they probably do have funds that are going to outperform indexes. I just don't know which ones they are and I don't know of how my review of their funds would reveal that information. You're a legend in your own mind. So I'm not in a position to tell you whether you should pick QMHNX over DBMF or any other particular fund. Crystal ball can help you. It can guide you. All I can tell you is that you really need to have done your homework and have a good understanding of what strategy they're employing and why you think it's better. I would place it over a candle and it's through the candle that you will see the images into the crystal. before choosing something like that over a fund like DBMF because you have to overcome the higher fee and the likely higher volatility that such a product is going to give you. It is interesting though, because this is one of the reasons I have felt that this area managed futures or trend following was really uninvestable for most do-it-yourself investors for the longest time. Not because people couldn't make money at it. It was just that it was too sophisticated and that choosing managers was just too hard for most do-it-yourself investors. I'm not a smart man. And so in terms of evolution, I am always looking for index-like products coming out of the financial services industry as portfolio builders. And we'll be curious to see how this will all evolve in the future, as I'm sure it will. You can't handle the crystal ball! 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, follow, give me some stars or review. That would be great. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Mary [29:38]

She complicated, left me and you to ride. She complicated, left me a mute to ride. 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.