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 [0:38]

Thank you, Mary, and welcome to Risk Parity Radio. If you have just stumbled in here, you will find that this podcast is kind of like a dive bar of personal finance and do-it-yourself investing. Expect the unexpected. There are basically two kinds of people that like to hang out in this little dive bar. You see in this world there's two kinds of people my friend. The smaller group are those who actually think the host is funny regardless of the content of the podcast. Funny how? How am I funny? These include friends and family and a number of people named Abby. Abby someone.

Mostly Voices [1:21]

Abby who? Abby normal. Abby Normal.

Mostly Uncle Frank [1:29]

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 [2:03]

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 [2:11]

But whomever you are, you are welcome here.

Mostly Voices [2:15]

I have a feeling we're not in Kansas anymore. But now onward, episode 271.

Mostly Uncle Frank [2:23]

Today on Risk Parity Radio, we are going to continue answering your emails, since they are always interesting and raise a lot of good issues.

Mostly Voices [2:35]

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

Mostly Uncle Frank [2:43]

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

Mostly Voices [2:49]

Vote for Pedro. Vote for Pedro. Vote for Pedro. Vote for Pedro. Vote for Pedro. Vote for Pedro. And Pedro writes.

Mostly Uncle Frank [2:58]

Frank and Mary, I wanted to start off my email by thanking

Mostly Mary [3:02]

you for encouraging listeners to consider donating to the Father McKenna Center. As the father of a recent graduate from Xavier High School in New York City, we spend quite a bit of time donating time and money to the food pantry that helps our less fortunate neighbors with something as basic as a meal. I did just make a donation to the Father McKenna Center, which I understand provides me with the opportunity to have my email cued to the front of the line, but I actually appreciate more the opportunity to try to replicate some of what we do here locally beyond the borders of New York City. After all, our success is not measured by the amount of money we have, but by the number of people we can help. Well, it is money they have and peace they like. With regards to my question, and you covered a bit of it on the last episode, episode 269, I am in the process of giving serious thought to starting to convert my mostly stock portfolio into something that resembles the Golden Ratio portfolio. As part of that process, I have two questions. One, the vast majority of my taxable portfolio is held in ITOT, which is an iShares Total Stock Market product. As part of beginning the conversion, do you view ITOT as a proxy only for VUG, meaning that in addition to having to begin to convert part of the portfolio to long-term bonds, gold, and REET, I also need to begin to sell some ITOT and purchase the small cap value and low volatility risk diversifiers or is ITOT more of a one-stop shopping option that covers the stock part of the portfolio? Two, as alluded to in question one, the remainder of my portfolio is in tax-advantaged accounts such as 401, SEP, etc., over which I have little or no options in terms of the investments. Did you encounter this same dilemma as part of constructing your portfolio, and what advice would you give to address this issue? Is it as simple as you unfortunately need to wait until you are able to convert those accounts into a rollover IRA or similar product? Thanks in advance for your thoughts on these two questions.

Mostly Voices [5:24]

If you vote for me, all of your wildest dreams will come true.

Mostly Uncle Frank [5:29]

Well, first, thank you so much for donating to the Father McKenna Center. As you may have heard, This podcast does not have any sponsors, but it does have a charity, and all of the money that we collect does go to the charity, which is the Father McKenna Center, which serves hungry and homeless people in Washington, D.C. And if you donate, you get to go to the front of the email line, like Pedro. And it sounds like your experience at Xavier High School was Similar to ours, the Father McKenna Center is in a space donated to them by the Gonzaga High School in Washington, DC, where our children attended and they volunteered at the Father McKenna Center while they were there. Two of our sons also did Eagle Scout projects for them. One of them was creatively named Under Clothes for the Underserved because one of the Needs for the homeless are brand new socks and underwear because that is not something you want donated. So our middle son went on a campaign and collected a lot of that for the center. And it's interesting that you mentioned about not the amount of money but the number of people that can be helped because that is actually how we track a lot of what we do there and include that in our Form 990, which we file with the IRS every year. But that is a public document if you ever want to see what we're up to. And so thank you again for your support. Now getting to your question, and it boils down to, did I encounter this same dilemma as part of constructing your portfolio and what advice would you give to address this issue? And the answer is, no, I did not actually encounter this. You might say that I cheated, but I cheated in a legal way. The 401k, where we had most of our assets, had a self-directed feature, and I don't know whether yours does or not. If you do have a self-directed feature on a 401k, you generally can open kind of a regular brokerage account, move assets into it, and then just buy whatever you want. as if you were at Fidelity or Schwab or Vanguard. And then we also had taxable and other accounts. But that answer is probably not very helpful to you. So let's see if we can do a little bit better here. First, let's talk about ITOT. Yes, that is a very good total market fund, one of the originals. I think it was an ETF that preceded Vanguard's VTI and perhaps Schwab's as well, but probably convinced them that they needed to get an ETF on the board, just like I did. But you are correct that I would only use that as a proxy for a large cap growth fund or a total market fund or an S&P 500 fund because it is tilted towards large cap growth when you look at its components or put it on the analyzer there at Morningstar or wherever you have one of those nine box grids that has the size and then value versus growth factors built into it. So you will want to move over some of that to the value side and in particular that small cap value.

Mostly Voices [9:04]

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

Mostly Uncle Frank [9:08]

Now you could set up this portfolio or this part of this portfolio, just like you might see in a golden butterfly portfolio where the two stock funds are just a total market fund and a small cap value fund. We did something a little bit different in the sample golden ratio portfolio. And what we have there is a large cap growth fund, that VUG, that is completely large cap growth and far over on the spectrum. and then we combined that with a small cap value fund, but then also added this low volatility fund, which really is a large cap value fund when you look at it. What I'm trying to tell you is there's nothing terribly magical about those three funds, those three stock funds in the Golden Ratio portfolio, but you do want to have low cost funds that are essentially divided into the growth side and the value side. and include some small cap value and some large cap growth in that kind of mix. So all that being said, the short answer is yes, you do want to diversify out of ITOT to acquire some more value tilted funds.

Mostly Voices [10:20]

Sounding great, but I could have used a little more cowbell.

Mostly Uncle Frank [10:27]

And now I should also talk about that REIT fund that we have in the sample golden ratio portfolio, REET. That is more been chosen for convenience because I didn't want to have a bunch of different REITs in my own portfolio. We actually do have a bunch of different REITs. If you're interested in REITs, I would go back and listen to episodes 19 and 21 of this podcast where we talk about the various kinds of REITs that are available and why you might not want to use a standard REIT fund. The problem with REIT funds is they are tilted in such a way that they are not really capturing these days most of real estate. What you see in a lot of those funds, including VNQ and R E E T, is a heavy emphasis on things that are things like cell towers and data centers because those are in fact the largest REITs. And so while there's nothing wrong with that fund in particular or another fund like VNQ, you're probably going to be better off picking a few different ones from different sectors and equally weighting them. Which leads me into my next general observation, which I've made at various points in time, that that sample golden ratio portfolio is not intended to be the be all and end all of all golden ratio kind of portfolios. And in particular, the key aspects of it are the 42% in stock funds divided into growth and value, the 26% in long-term treasury bonds, and the 16% in gold or thereabouts. The remainder, the 10 and the 6%, can be varied depending on what you're trying to do. So if you wanted, for instance, a more conservative version of that, you could make the 10% just in short term bonds and make the 6% something else. You just want to try to diversify that remaining 16% from the other three big asset classes you already have and then make it suit what you are doing overall. So I know other listeners have done things like use utilities for that 10%. or use managed futures for that 10% or add it as part of their mix. And all of those things can be valid constructions in addition to what you see as the sample portfolio. Hopefully that helps and I really do hope you have a self-directed option in your 401k because that would make things a whole lot easier. Yes! And thank you for your email.

Mostly Voices [13:16]

Pedro offers you his protection. Second off, we have an email from Graham.

Mostly Uncle Frank [13:35]

And Graham writes, Dear Uncle Frank, what to

Mostly Mary [13:39]

do when a large portion of our tax protected assets are in the Thrift Savings Plan? I'd like to put my bond allocation there, but the only option is the G Fund, which is short-term Treasuries. We have a smaller SEP-IRA, which is full of VGLT and KMLM, but my overall bond and managed futures allocations is still lower than I'd like it to be. The brokerage and Roth IRA accounts contain the equities and gold. Is there any reason to invest in the G Fund and consider it part of my bonds allocation? or would it be better to just locate more bonds and managed futures in the brokerage and Roth accounts, even though not ideal? Between VGLT and KMLM, VGLT has the lower yield, so it makes sense for that to be the first to go into the brokerage account, correct? I'd appreciate some nonsensical ravings on this topic, and please send my regards to Mary, your loyal listener, Graham.

Mostly Voices [14:39]

Mary, Mary, I need your hug.

Mostly Uncle Frank [14:47]

All right, the Government Thrift Savings Plan has five funds in it, in addition to some lifestyle things. But there are actually two fixed income funds, the G Fund, which is the short-term Treasuries, and then the F Fund, F as in Frank, which is basically an intermediate bond fund. which has both treasuries and corporates in it. I would probably use that for a large part of your bond allocation instead of the G Fund. That is closer to VGIT, although it's going to be less volatile and less useful for rebalancing and diversification. That's the fact, Jack! That's the fact, Jack! And so you may need to hold a little bit more of the F Fund to get the same kind of bang for your buck, if you will, than you would for a fund like VGLT. But if you are accumulating, you probably don't need anything allocated to a short-term fund like a G fund or a money market or a short-term bond fund and could use that space for the F fund, if that makes sense. Now, in terms of these other locations, that fund KMLM is pretty volatile and has a good potential for returns. So you might want to put that one in your Roth account. You definitely do not want that in your brokerage account if you can avoid it because it will throw off substantial distributions at the end of the year. Hearts and kidneys are Tinker Toys. Which then leads you to the decision of whether You want gold or VGLT in the brokerage account. And I might just swap out the gold that's in your Roth into the brokerage account right now. Because it's unlike these other asset classes, it's not paying any income. It's at or near an all-time high, so it's more likely to go down in the near term than it is to go up. and you probably won't be selling any of it anytime soon, whereas I think you're probably more likely to be buying or selling some VGLT given its relative volatility. So my lunatic mind ultimately says is load up a little bit on the F Fund and then move a few things around, put the KMLM in a IRA of some kind, and then maybe split the difference as to how much gold and how much VGLT are in and out of the brokerage and Roth accounts.

Mostly Voices [17:28]

I am a scientist, not a philosopher.

Mostly Uncle Frank [17:31]

It's probably not ideal, but it's the best raving I can give you at this point in time.

Mostly Voices [17:39]

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

Mostly Uncle Frank [17:43]

And so hopefully that helps. Thank you for your email.

Mostly Voices [17:47]

Class is a Dismissed.

Mostly Uncle Frank [17:59]

Last off, we have an email from Nathan.

Mostly Voices [18:02]

Hot dogs, hot dogs here. Hot dogs, hot dogs, hot dogs. And Nathan writes.

Mostly Mary [18:14]

Hey, Frank, I'm friends with Diana Miriam. We were chatting about investments and I was wondering about VC S A X as a one fund portfolio versus an 80/20. 20 option. She said she had no idea, but I should reach out to you to see what you think.

Mostly Uncle Frank [18:30]

Well, I'm always happy to help out a friend of Diana, since she has been a good friend. It's top drawer.

Mostly Voices [18:37]

Really top drawer.

Mostly Uncle Frank [18:41]

She is getting a little famous these days. She was on Good Morning America talking about her financial independence journey. I believe last week. Fortune favors the brave.

Mostly Voices [18:52]

I'll see if I can find a link to that on YouTube or somewhere

Mostly Uncle Frank [18:56]

so you can check it out. But unlike me, she actually comes off as a normal person, both on television and on her podcast, Optimal Finance Daily, which is a nice little daily tour of various finance blogs and information. In about 10 minutes. I'll link to that and you can check that out too, if you haven't already. Don't be saucy with me, Bernaise. But now, getting to your question, you were wondering about VC S.A.X. as a one fund portfolio. Well, let's talk about what VC S.A.X. is. VC S.A.X. is Vanguard's Sector Fund for Consumer Staples. There's also a ETF version of this called VDC, D as in dog, C as in cat.

Mostly Voices [19:52]

Dogs and cats living together.

Mostly Uncle Frank [19:56]

Now let's talk about how you should go and research or look at a fund when somebody says, what about this? What I usually do these days is go to Morningstar and they have a nice Fund Analyzer, descriptor tool in there. And so you go and put your fund in there and then you can bring it up and it tells you all kinds of things about the fund. It's returns and most importantly, what's in it. So you want to go to that portfolio tab, click on that link and then it'll bring up what's in the fund. Now, one of the things that's important to know about any fund that you're considering is what are its factor characteristics? And that's what we talked about earlier in this podcast with respect to ITOT. But with respect to VCAX, when you look at that, you can see that it is a large cap value fund. It's still slightly in the blend category, but it's leaning over there towards value. But more importantly, if you go down then and look at what its composition actually is, you can see this is a very heavily concentrated fund in just a few companies. And so over 40% of this fund is in just five companies. And those companies are Procter and Gamble at a little over 12%, Coke and Pepsi, and then Walmart and Costco. Those companies comprise over 40% of this fund and will be the main drivers of what goes on in this fund. Although this fund will change drivers over time because its algorithm will keep buying the largest and most consumer stapley companies as time goes on. So would I use this as a one fund portfolio versus an 80/20 option? Probably not because it is a sector fund. And typically sector funds are a little bit hard to use for amateur investors. Because they are really designed for people who are either constructing their entire index out of several of these things, or are trying to trade sectors and jump in and out of them based on economic factors or the news or whatever else they're using to analyze these things. A crystal ball can help you. It can guide you. So they're really not set up to be core holdings for Basic investors. Now, funds like this tend to outperform the stock market, the rest of the stock market when the stock market is doing poorly and then will underperform the stock market when the stock market is doing well because they're known to be conservative or defensive funds. So you would not expect this to grow very well over time without having some of that large cap growth in it, like the tech companies and the consumer discretionary companies. Now whether it would be better than a simple 80/20 portfolio, when I'm thinking of a simple 80/20 portfolio, I'm thinking of a total market fund like VTI and then like an intermediate treasury bond fund like VGIT or a total bond market fund like BND as the 20. And actually this fund and that combination might perform pretty similarly in a lot of environments. But over time, the 8020 option is probably going to be better because it's going to have outperformances in various years and then it's going to allow for rebalancing. When you get an outperformance, you'll be able to sell what's high and buy what's low. And that rebalancing activity over time will help that portfolio perform a bit better. Now, I went ahead and ran a simulation in Portfolio Visualizer to compare these two things, which is another thing you can do. Unfortunately, the Vanguard Consumer Staples Fund only goes back to 2004, which is not really a good place to start an analysis. from. I was able to take XLP, which is a Spider Consumer Staples fund, which has almost the same stuff in it, and use that and compare it to a simple Vanguard 8020 portfolio. And it shows they perform similarly. The 8020 portfolio is a little bit better over that time period from 1999 until now, and that doesn't surprise me. But I'll link to that and you can check it out. In the end, I don't think I would use this simply because of its concentrations. While those companies are not likely to have any problems in performing, owning a fund that is that concentrated as your only holding does just give me some pause. So I would rather have something that's more diversified like the 80/20 option. If you are accumulating, I would suggest you move more towards a 100% equity option if you can stomach it, and something that covers the entire market. And as we've mentioned before, one good solution for that is something that is a large cap growth or total market fund paired with a small cap value fund in a 50/50 split. I also ran that in the Portfolio Visualizer simulation. so you can compare it with the other two and you'll see that did perform a lot better, which isn't surprising since it's 100% equities and spread out over the entire market as opposed to concentrated in a large cap value selection. So hopefully that helps. Say hello to Diana the next time you see her for me. Oh, be have. Yeah. Yeah, baby. And thank you for your email. The great Oz has spoken. But now I see our signal is beginning to fade.

Mostly Voices [26:20]

Do not arouse the wrath of the great and powerful Oz. I said come back tomorrow.

Mostly Uncle Frank [26:24]

If you have comments or questions for me, please send them to Frank@riskparityradio.com. www.riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com and put your message into the contact form and I'll get it that way. We'll pick up this weekend with weekly and monthly portfolio reviews and some more emails. 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, a follow. That would be great. M'kay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio, signing off.

Mostly Voices [27:10]

It reminds us of all that once was good and it could be again. Oh, people will come, Ray. People will most definitely come. The Risk Parity Radio Show is hosted by Frank Vasquez.

Mostly Mary [27:32]

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.