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 [0:36]

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!

Mostly Voices [0:51]

And the basic foundational episodes are episodes 1,

Mostly Uncle Frank [0:54]

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.

Mostly Voices [1:28]

Top drawer, really top drawer, along with

Mostly Uncle Frank [1:31]

a host named after a hot dog. Lighten up, Francis. But now onward, episode 273. Today on a risk parity radio, it's actually time for a little bit of a celebration. This podcast has crossed 500,000 downloads, half a million. Release tones. And I just wanted to thank all of you listeners out there. I realize this is not a conventional presentation of a podcast, and it's more of a creative outlet for me.

Mostly Voices [2:13]

I don't think it misses what you think it misses. Kind of a cross between Charlie Munger and Robin Williams No, no, non,n,nn,,n picture of a man going on a journey beyond sight and sound. He's left Crete he's entered the demilitarized zone. De la De la What is it demilitarize on? Sounds like something out the Wzard of Oz. Oh, no, don't go in there. Oh, Horachman. Or maybe Mel Brooks.

Mostly Uncle Frank [2:51]

Talk him out of anything. But it looks like we have over a thousand regular listeners from all over the world, which is more success than I ever dreamed of having in terms of a listenership because this podcast was never intended to appeal to a large audience. Shirley, you can't be serious. I am serious.

Mostly Voices [3:14]

And don't call me Shirley.

Mostly Uncle Frank [3:18]

But only really to people who wanted to go up a level from conventional personal finance.

Mostly Voices [3:22]

Well, Laddie, frickin' da.

Mostly Uncle Frank [3:26]

And so when I say in the intro that we have the finest podcast audience available, I really do mean that for something like this because the kinds of questions and issues and things you bring to my attention are really on a higher level than I hear on most personal finance podcasts.

Mostly Voices [3:46]

And that's the way, -huh, -huh, I like it. And I think I learn as much from you as you may learn from me. You can't handle the gambling problem. Anyway, it's all good. Yeah, baby, yeah.

Mostly Uncle Frank [4:02]

It does remind me I probably need to re-record some of my intros. And so if you have come across any of the podcasts that you find foundational or particularly interesting, let me know what those are through an email and I will add them to the list. Because I do realize that for newer listeners, this is kind of walking into a conversation that's been going on for months and now years. So having a little direction there helps. And in that regard, we do have some emails from some regulars today. Let's do it. Let's do it. And so without further ado, here I go once again with the email. First off, first off, we have two emails from Alexi.

Mostly Voices [4:54]

So that's what you call me, you know, that or his dudeness or duder or, you know, Bruce Dickinson. If you're not into the whole brevity thing. And the dude writes.

Mostly Mary [5:08]

Nice appearance on Security Analysis. You are everywhere for a supposedly retired dude with a self-professed blasé attitude for work. But it's still not enough. Never enough. Keep it coming, AZ. I don't think I'd like another job. Just finished the rest of the pod. Great performance. I didn't know that you did the voices of your sound clips Plus, you mentioned me. I'm famous. Bravo.

Mostly Uncle Frank [5:35]

Well, the dude is referring to my appearance on the Securities Analysis podcast run by the Value Stock Geek. And I was on an episode last month to talk about this podcast investing and my general silliness. And so of course I had to mention the dude in that context. And I appreciate all the contributions you've made over the past couple of years here. The dude abide. As for doing the voices, there's only one thing that counts in this life. Get them to sign on the line which is dotted. Forget about it. And if you know me in real life, you know that I've been Quoting such things and engaging in such demonstrations for about 50 years now. Looks like I picked a bad week to quit amphetamines. Now, I don't know if that's going to get me on too many other people's podcasts, but we'll see. In any event, thank you for your encouragement and thank you for your email. Take it easy, dude. Oh, yeah. I know that you will.

Mostly Voices [6:49]

Yeah, well, the do unto binds.

Mostly Uncle Frank [6:54]

Second off. Second off, we'll move on to another regular. And who might that be? It's my contact info.

Mostly Voices [7:05]

Oh, I didn't know you were doing one. Oh, sure.

Mostly Mary [7:08]

And my contact info rights. Frank, you made a great point on episode 268 about total return versus safe withdrawal rate. If I understood correctly, your idea is that the individual does not need to think in terms of either or. No hypothesis. A safe withdrawal rate is a chimera and the distinction between total return and safety of income is at best a false dichotomy and at worst a pernicious investment framework. Impossible to calculate safe withdrawal rate and every portfolio has a safe withdrawal rate, but it is unknown. I think this is one of the key operating principles behind risk parity portfolios and their ilk. Thank you.

Mostly Uncle Frank [7:55]

Well, the truth is that safe withdrawal rates and total returns are related, but they are not the same. And I think that's one of the big misunderstandings that amateur investors have these days, thinking that they can improve their safe withdrawal rate by improving or increasing the amount of stocks they have in their portfolio. So they'll say things like, well, instead of having a 60/40, I'll just go to a 75/25 or an 80/20, and that will magically fix any safe withdrawal rate issues I have because the returns will be higher. It doesn't work that way, unfortunately. That's not how it works. That's not how any of this works. Because the other component there is the overall volatility of the portfolio and in particular the expected drawdowns both in depth and in length. And so what that means is there is a sweet spot and in particular for stock-based portfolios, many researchers going back now 30 years to Bill Bengen's original research have found that that percentage is somewhere between about 40% and about 70%. and that your safe withdrawal rate is not going to get better by going over 70% in stocks. It's just not. Forget about it. Now the reason for that has to do with one of our key principles, the Holy Grail principle, which we stole from Ray Dalio. And the idea of that is that if you have a number of different uncorrelated assets with reasonable positive returns, it will improve the overall performance of your portfolio. And in particular, it's going to improve the safe withdrawal rate. Now, another idea that is not well understood by a lot of investors is that correlations are not magical things. You can measure them with numbers, but the reason things are correlated or uncorrelated has to do fundamentally with how they perform within various macroeconomic environments. Now many people have come up with formulations of, well, what do the various macroeconomic environments look like? The most common one is the one propagated originally by Bridgewater, which is you can look at on one axis increasing or decreasing growth in the economy, and on another axis increasing or decreasing inflation in an economy. Sweet! And no, those are not the absolute number, but what is more interesting is what you would call the first derivative or how that is changing in a particular environment. If you put those things on two axes, then you have four quadrants, and within each of those quadrants you can place various assets as to whether they will perform better or worse or are likely to perform better or worse in that kind of environment. and I'll see if I can link to something in the show notes with those four quadrants. I'm sure there is something back in episodes three or five or seven probably. But fundamentally what you're trying to do when you're constructing a diversified portfolio, risk parity or otherwise, is to select assets from all four of those quadrants. And that will give you the highest probability of having a diversified portfolio and also the highest probability of having a high safe withdrawal rate for the portfolio that you construct, assuming that it has enough return drivers in it. Which is also why you don't want to have too much cash or cash equivalents in a portfolio because it will drag down the overall performance of the portfolio just because it has low returns over long periods of time. But I think thinking about your assets in this kind of quadrant model does help you with very long-term thinking and doesn't get you wound up in thinking, well, there's a new paradigm now and all the quadrants have changed or other things like that. It just doesn't work that way. And there really isn't anything new under the sun, even though people are always looking for something to talk about along those lines.

Mostly Voices [12:24]

Human sacrifice, dogs and cats living together, mass hysteria.

Mostly Uncle Frank [12:31]

But thank you for bringing up that topic. It does get us back to some fundamentals. And thank you for your email.

Mostly Voices [12:39]

Bow to your sensei. Bow to your sensei.

Mostly Uncle Frank [12:46]

Last off, we have a new emailer. This is an email from Brown.

Mostly Mary [12:55]

And Brown writes：Dear Uncle Frank and Aunt Mary, Given its large size and diversified holdings as a company, what are your thoughts on incorporating Berkshire Hathaway stock as a core holding in one's risk parity portfolio? I'm currently overweight on large cap growth and looking for alternatives to balancing it out, along with some small cap value cowbell. I gotta have more cowbell. I gotta have more cowbell. According to the asset correlations matrix on Portfolio Visualizer, Berkshire has lower correlations to large cap growth and to overall market than small cap value with comparable annualized returns and standard deviations to those indexes. Do you think it might be useful to include Berkshire as a diversifying asset in a long-term buy and hold retirement slash risk parity type portfolio? Could it be used as an alternative for a portion of the value ETF allocation? Love the podcast and thanks for all you have done to help us do it yourself investors. Brown. Well, the answer to your question is. Yes.

Mostly Uncle Frank [14:07]

But it's really something that you would actually build a portfolio around. And the reason is that, and this goes back to episode 171 where we also talked about this. is that Berkshire Hathaway is a large cap fund. It used to be more of a large cap value fund. Now it is more similar to an S&P 500 fund. And the reason that is the case is because it has a large proportion of Apple stock in it. So whereas you used to characterize it as purely large cap value, now you would probably characterize it as large cap blend. But knowing that and knowing it's got these broad holdings, you can certainly take that and then design the rest of your stock portfolio around that to either include a little bit more on the growth side or the small cap value side. I would imagine that Berkshire Hathaway and a small cap value fund should work pretty well. The only caveat is that you need to monitor Berkshire Hathaway kind of every year to determine where it falls in terms of its size and value versus growth factors. And you may need to make some other adjustments in your portfolio. Because as we've talked about, kind of the sweet spot for constructing the stock part of a portfolio that you are using for retirement and drawing down on is to have something that is at least half on the value side. And if Berkshire keeps moving towards growth because of Apple or other things that it may acquire, that may change the rest of what you're building around it. But you can certainly use it in that way as long as you are committed to holding it long term. It functions mostly like a closed end fund. And that's the way I would think of it. So if you don't mind the small complications of having to dissect what's actually in it in a given particular year, that could be a good choice for you. Which goes to the broader point that I'm really hoping to talk about, principles of investing here mostly, and not worry so much about the very specific funds or assets, although I know we have to do that to give people examples to work with. Everything that has transpired has done so according to my design. So I'm glad you are taking these principles and modifying them to your taste.

Mostly Voices [16:40]

Now there's only one use for money and that's to make more money. And thank you for that email.

Mostly Uncle Frank [16:47]

But now I see our signal is beginning to fade. I know I made this a short one, but short is better sometimes. And I need to get back out on this bicycle. Uncle Frank needs to lose some weight. You're a very sick man. You know that, don't you?

Mostly Voices [17:02]

Ah! Thank you!

Mostly Uncle Frank [17:06]

But that's what happens when you spend too much time in an easy chair. Let's try something.

Mostly Voices [17:10]

Let's play this backwards and see if it gets any better. Woof! There's neviwif! Freddie is a devil! Woof! There's neviwif! Freddie is a devil!

Mostly Uncle Frank [17:21]

No, no, no, no, no, no, no, no, no, no, no, no, no! 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, a follow. That would be great. Mmmkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Voices [17:59]

Oh, look, you've landed in Saigon. You're among the little people now. We represent the Arvan Army, the Arvan Army. Oh, no, follow the Ho Chi Minh Trail. Follow the Ho Chi Minh Trail. Oh, I'll get you, my pretty. Oh, my God, it's the Wicked Witch of the North. It's Hanoi Hannah. Now, little GI, you and your little to-do, too.

Mostly Mary [18:22]

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.