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 [0:18]

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 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. But now onward, episode 275. Today on Risk Parity Radio, we don't have much time, so we're only gonna do a couple of emails.

Mostly Voices [2:03]

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

Mostly Uncle Frank [2:11]

And first off, we have an email from Essek.

Mostly Mary [2:14]

and Essex writes. Hi, Uncle Frank and Aunt Mary. I'm a father McKenna Center donor and hoping others will join me. Let's do it. Let's go. One topic that isn't discussed with any clarity is how to account for the dark, scary topic of long-term care, which may be waiting out there for those unfortunate Souls deep into their retirement to feed upon their unsuspecting portfolios that are just happily floating along. Insert Jaws theme music. Have you given this any thought? Any suggestions on how one might think about self-funding? Personal philosophy? Wade Pfau provides a detailed discussion of this topic in his book, Retirement Planning Guidebook：Navigating the Important Decisions for Retirement Success. Basically, one has to have enough in the portfolio to support their partner while simultaneously paying for long-term care. He gives a lengthy and detailed discussion that I found interesting. When discussing the 4% rule and portfolio planning, no one ever talks about how the long-term care shark can come by and take a chunk out of your plan or sink your retirement boat. You're going to need a bigger boat. Martin Brody Jaws.

Mostly Uncle Frank [3:52]

Well, first and foremost, thank you so much for being a donor to the Father McKenna Center. As most of you know, we do not have any sponsors on this podcast. All we have is a charity. And if you donate to the charity, you get to go to the front of the line as far as the emails are concerned. and you have my undying gratitude.

Mostly Voices [4:12]

Yes!

Mostly Uncle Frank [4:16]

Full disclosure, I am on the board of the charity and I'm also the current treasurer of the Father McKenna Center. If you're interested in that, you can go to our support page and I'll also link directly to the center in the show notes. And if you do donate and send me an email, please remind me in the email as Essek has done so I can move your Email to the front of the line. Really top drawer. But now let's get to that email. Well, long-term care is one of these great unsolved mysteries of retirement. You're gonna need a bigger boat. And one of the problems with it is that it's almost impossible to prepare for it decades in advance because there are too many unknown variables. I was listening to another podcast talking to a financial advisor who had been in the business for years, and I'm afraid I don't remember which one it was. But he was saying that, you know, back in the day, insurance companies sold a lot of long-term care insurance and then realized in the decade thereafter that they had made a big mistake in the way they had priced it. And the consequences of that are They've raised their prices on long-term care insurance so much that it is unaffordable or unworkable for most people. And he's had a number of people who he's told, yeah, go out and price that and see if you really want it, or we'll look at the prices for it. And in all circumstances in the past few years, they've said it costs too much. Forget about long-term care insurance. Now, why is that? And why is this a problem that may not be solvable decades in advance? The short answer is there are too many variables involved. If you were to compare long-term care insurance to something like life insurance, life insurance is relatively easy to price because we have something called the Gompertz mortality curve so that you can look at a large population of people and pretty much predict how many people are going to be alive 10, 20, 30, 40 years hence. And there's a well-known formula for calculating that. And I think it's something like your risk of dying doubles every eight years. Now, there's no such curve or calculation for dealing with something like long-term care insurance. And the problem is it's so idiosyncratic to individuals and Some people may need none of it, whereas other people and where all the expenses are going to go are just for a relatively few people in the population are going to be spending the lion's share of the money. In fact, if you look at how health care spending works in the United States, something like 40% of all health care expenses are expended during something like the last six months to a year of life. and you do end up with this kind of power law distribution as to how much is expended on any given individual. And because you're not dealing with a normal distribution from a data perspective and dealing with this kind of power law distribution, it is not possible to come up with some kind of generic 4% rule-ish kind of rule of thumb about long-term care insurance or handling long-term care Generally, it's basically like taking a thousand mile journey in a car and trying to plan in advance for the potholes on the road without knowing where they are, just that they're likely to be more near the end of the journey than at the beginning of the journey. Now, the fact of the matter is statistically, this is actually not going to be much of an issue for most people because most people are going to succumb in a relatively short period of time. I think really the median use of long-term care is only a year or three or something like that. Surely you can't be serious. I am serious. And don't call me Shirley. Which most people don't recognize because a lot of the marketing on this is along the lines of you could end up spending decades in long-term care. Do you have life insurance? Because if you do, you could always use a little more. I suppose you could, but the likelihood of that occurring is not that high. So you start with a relatively small probability this is going to be an issue. Significant, but still relatively small. And then the next issue is it is highly dependent on your genetics. Mary and I are generally fortunate. We do not have histories of dementia in our families. My parents are 94 and 89 years old. Hers are in their 80s. They are all living unassisted lives. And when people have become infirm in our families, they really haven't lasted that long for the most part. Now that may or may not be true for your family.

Mostly Voices [9:22]

Some of the things I've said may not apply to you. Some of the things I've said may offend you.

Mostly Uncle Frank [9:26]

And there is no way of knowing and no way of saying this rule should apply to everyone. So the first step, I think, is to really sit down and think about this just anecdotally and then talk to a doctor because now they can do actually genetic tests to see for whether people are more or less likely to have something like Alzheimer's or not. And those kind of advances in medicine are occurring all the time. The next thing to recognize is that this is not largely a monetary issue. This is largely a health issue. and you do actually have a lot of control, or most of us have a lot of control over our general health and how we handle ourselves, what we put in our bodies, whether we exercise, all of those sorts of things.

Mostly Voices [10:16]

I am Hans, and I am Franz, and we want to pump you up.

Mostly Uncle Frank [10:21]

Now, if you're looking for the expert on all things aging, you should look to Peter Attia. who runs a podcast called the Drive, which is all about aging well and having as long a health span as possible. He talks about qualifying for the centenarian Olympics.

Mostly Voices [10:41]

As you know, Cousin Arnold was put in charge of the president's council on physical pomptitude. Arnold's dream is to create a flabless utopia, but alas, the girly man is a formidable opponent. That's the But hear me now, and don't believe me later. We can easily crush girly men like grapes. That's right. And make a nice, dry white wine.

Mostly Uncle Frank [11:05]

And he's pretty hardcore about it, but I can tell you that every useful scientific or medical discovery that comes out about these issues is something that he covers, including things like simple supplements. Evidently according to what he's found, Taking fish oil supplements with the correct fats in them decreases your chances of getting something like dementia. And no, don't quote me on that because I'm just remembering it off the top of my head. I'd have to go back to his podcast or his new book Outlive to tell you exactly what that is. Man's got to know his limitations. I do not wish to turn this into a health podcast.

Mostly Voices [11:44]

Forget about it.

Mostly Uncle Frank [11:48]

But he also talks about monitoring carefully and controlling things like high cholesterol and high blood pressure, all the basic things we all know we're supposed to be doing, but lots of people just don't do it.

Mostly Voices [12:00]

But what's easy to do is what? Easy not to do.

Mostly Uncle Frank [12:04]

Because the truth is, if you can live a longer health span further into your life or aging and still be walking around. If you can do that, the chances are when it's time to go, you're gonna go rather quickly.

Mostly Voices [12:20]

I'm not dead. Yeah. He says he's not dead. Yes, he is. I'm not. He isn't. Well, he will be soon. He's very ill. I'm getting better. No, you're not. You'll be stone dead in a moment. I can't take him like that. It's against regulations. I don't want to go over the car. Oh, that would be. such a baby. I can't take him. I feel fine. Well, do us a favor. I can't. Well, can you hang around a couple of minutes? He won't be long. No, I've got to go to Robinson's. They've lost nine today. Well, when's your next round? Thursday. I think I'll go for a walk. You're not fooling anyone, you know. Look, there's no something you can do. I feel happy. I feel happy. Oh, thanks very much. Watch all.

Mostly Uncle Frank [13:09]

But getting back to the financial aspects of this and the planning for it, I think one of the drawbacks and the problems with this issue is the approach that financial advisors want to take with you on this. And what they want to do always is try to plan out the rest of your life from like age 55 or 60 or whenever you first go in and come up with whatever plan this is. The truth of the matter is that's probably not a good way of approaching it. trying to plan out what's going to happen in 20 years when there are too many unknown variables, including your health, your spouse's health, many other things that could happen between now and then. What that tells you is you want to have flexibility with respect to some of this stuff because the solution that you may come up with it may be and is likely to be idiosyncratic to your particular situation. for instance, if you know one of you is beginning to deteriorate, you can probably plan for that and say you're both in your 70s and you're looking at, well, what should we do? Maybe the solution then is to take out a life annuity on the healthy partner, the one that's surviving, to make sure that their wealth is preserved. And that's just an example. The other thing you need to recognize is if one of you starts becoming demented at age 75, that means your retirement is probably a pretty short one. It's not even a 30-year retirement. It's a really short one, in which case you're probably going to be able to self-fund that. To me, this is just an argument or the best solution when you're younger is to simply create plans that keep all your options open so you're not locked into some contract or something that may not be the right fit for you, but you don't have any idea of that until you get some time into your 70s. Because if you're getting your regular checkups and you should be getting them.

Mostly Voices [15:02]

Before you oil up, it's very important to shave all your body hair. Yeah, that's right. We are completely hairless, believe me.

Mostly Uncle Frank [15:11]

Most of this stuff will not suddenly appear. It will be a gradual decline. So my own feeling is that the probability of not being able to plan around this if you have a decent plan in place already is going to be pretty small. I certainly would not let the long-term care tail wag the entire retirement planning dog, unless you've got some particular family history that bears attention. So our basic plan is to try and stay as healthy as we can and to keep our financial options open as far as far as how we manage our retirement portfolio, I cannot say that I have any magic solutions for this problem. But it's always good to think about, as long as you don't obsess about it. And thank you for your email. That's a 20-footer. 25. Three tons on them.

Mostly Voices [16:15]

You're going to need a bigger boat, right? Gotta get it worked. Last off.

Mostly Uncle Frank [16:25]

Last off, we have an email from Jeffrey.

Mostly Mary [16:29]

And Jeffrey writes, Frank, it seems like most risk parity portfolios allocate somewhere around 40% to stocks. Given that, I noticed that in general, the trend on any given year is for risk parity to follow the stock market's general movements. For a generic risk parity portfolio, 40% stocks, 20% LTT, 20% commodities, and 20% managed futures. In the past 15 years, there was only one year where it moved in an inverse direction of the stock market, meaning the risk parity being positive for the year and the stocks being negative or vice versa. In all other 14 years, if the stock market was down for that year, then the risk parity was also down, although less so in most cases. And the same went for if the stock market was positive for that year, then the risk parity was also positive. If you are trying to build a portfolio that is not beholden to the stock market's movements, why would you not keep the stock portion at around 25%? If holding a risk parity portfolio means you are going to follow the general trend of the stock market up or down, Then doesn't it just become a buffered stock fund at that point? Thanks, Jeffrey.

Mostly Voices [17:45]

Au contraire. Don't be saucy with me, Bernaise.

Mostly Uncle Frank [17:50]

Interesting questions. Let's see if I can address them. So first off, the goal to build a portfolio is not to build a portfolio that is not beholden to stock market movements. What we're trying to do here is build a portfolio that is likely to have a highest or higher safe withdrawal rate, regardless of whether it's correlated or uncorrelated with the stock market generally. In general, being correlated with the stock market isn't such a bad thing because the stock market goes up most of the time. The problem with the stock market is that it's very volatile. and can be down for extended periods of time, which is what kills your safe withdrawal rate. Now, if you look at traditional buy the book, risk parity style portfolios, they do actually only have 25 or 30% in stocks in them. That all seasons portfolio, that sample one, that reference portfolio is an example of one of those kinds of portfolios. Now, the goal of that kind of portfolio is actually not to come up with the highest safe withdrawal rate. The goal of that kind of portfolio is to balance out all of the risks of all of the asset classes held. And that risk is usually measured by volatility in some way. So what hedge funds would do is take something like that and then lever it up, add leverage to it to give it the same kind of risk characteristics as, say, the overall stock market, thereby creating a portfolio with the same returns as the stock market, but not having as much volatility as the stock market. And that is without reference to safe withdrawal rates whatsoever. Now, it's interesting, some portfolio personalities do in fact hold portfolios, their own personal portfolios, that are extremely low in their stock market exposures simply because they don't want to take any risk or very little risk. An interesting variation is the portfolio that Larry Swedroe holds personally. I'll link to an interesting interview of him recently on the podcast, or it's actually the video cast, Excess Returns, where he describes this portfolio. And his portfolio is something like Between 20 and 30% in stocks, that is almost all tilted towards small cap value, including international small cap value. Another 20 to 30% just in cash or cash equivalents. But then he's got 50% of his portfolio devoted to alternative strategies, including managed futures and other complex things like that. He's got investments in private debt, private equity, but I'll let you go watch the video if you're interested in it, because it is very interesting. And that would be an example of a portfolio that you would not expect to be very correlated with the stock market. And in fact, he mentions in it that, yes, when the stock market was doing well in whatever it was, 2018-2019, his portfolio was not doing very well, but then it sort of came on and did great last year when everything was strange in 2022. Another person who holds very little in the stock market is Bill Bengen. I'm pretty sure he holds less than 20% in stocks these days. I think Bill Bernstein also has a ridiculously low allocation to stocks, but all of these people are also dealing with ridiculously low safe withdrawal rates. So they don't really need the money. They can hold anything they want. They choose to hold these things either just so they can sleep better at night knowing nothing's gonna happen to their money, or they're very curious and interested to do other things like Larry Swedroe. But none of those concoctions are actually trying to do what we're trying to do here, which is come up with portfolios that are likely to have the highest safe withdrawal rates. Because what we're trying to do here is to try and find ways to spend more money, not spend less money.

Mostly Voices [22:14]

Now, there's only one use for money, and that's to make more money. But, Mr. Howell, I want to spend it to make people happy. Well, that's a very noble sentiment, very warm and generous, but stupid. Donate to the children's fund.

Mostly Uncle Frank [22:28]

Why? What have children ever done for me? And as a corollary to that, we also end up with portfolios with very short sequence of return risks. The kinds of portfolios we have here typically have maximum length of drawdowns of three to five years, as opposed to the maximum length of drawdowns of a standard 60/40 or similar portfolio, which has a maximum extended drawdown of over 10 years. That's not an improvement. So that is also another consideration. We talked about that some in the last episode, but I would also go back to that portfolio charts calculator I mentioned, that heat map where you can sort of see this graphically by putting in various portfolios and then seeing how long of periods that they've been down in the times that they've been down and how long that lasted. And then your last question, if holding an RP portfolio means you are going to be following the general trend of the stock market up or down, Then doesn't it just become a buffered stock fund at this point? The answer to that is no, absolutely not.

Mostly Mary [23:38]

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

Mostly Uncle Frank [23:42]

What is a buffered stock fund? A buffered stock fund, either is stocks with a big pile of cash as the buffer or some kind of option strategy built into it or attached to it. that both mutes its highs and its lows. And as I was just saying, you can look on the heat map. If you put in a portfolio like that, that is all stocks with a pile of cash, which is a popular portfolio these days, because people have not obviously run these simulations with them. If you do that, what you end up with is still a portfolio that could be down over a decade in length. That's not an improvement. Because yes, its performance is muted, but you still have that volatility drawdown problem. Because the reason that you were holding these other assets is not just to buffer unquote the stocks. It's to be actually diversified from the stocks, performing differently at different times than the stocks. and then also adding some return themselves to the mix beyond what you would get out of cash. Now, what that also allows is for useful rebalancing, which will also improve the performance characteristics of the overall portfolio. So I would say that a properly diversified portfolio and a so-called buffered portfolio are two different things. And you really don't want the buffered portfolio. You want the diversified portfolio. that's going to have these characteristics in terms of drawdowns, both in depth and in length, and yield a higher safe withdrawal rate overall. That's what I'm talking about. I would caution you not to be looking at only 15-year back tests. That is not a long enough time to be looking at. This is why you really should go look at that heat map that I talked about. at Portfolio Charts. I'll link to it again. No more flying solo. You need somebody watching your back at all times. It goes back to 1970 and so you can put in various portfolios and look and see what their performance was like and how long they were down, particularly in the 1970s and then from the decade that lasted from 2000 to 2010. Those are the most two important decades to model. because those are the ones where the stock market had the worst performance and have the highest level of sequence of return risk. If you look at a period like the last 15 years, all you'll really see is the stock market going up almost every year. And so you're not going to learn much of anything from that, because if you were to think that that was the way things actually worked, you probably just hold 100% stocks and forget about anything else. Forget about it.

Mostly Voices [26:37]

As long as you weren't including 2008.

Mostly Uncle Frank [26:41]

But anyway, those were interesting questions and thank you for your email. 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 put your message in 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. Okay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Mary [27:47]

. 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.