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. 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 276. Today on Risk Parity Radio, it's time for the grand unveiling of money.

Mostly Uncle Frank [2:30]

Which means we're going to be doing our weekly portfolio reviews of the seven sample portfolios that you can find at www.riskparityradio.com on the portfolios page. But before we get to that, First, the charity that we sponsor on this podcast, the Father McKenna Center, was featured in the local news. And I thought that maybe some of you would like to take a peek at that little one minute story. So I will link to it in the show notes. It's a nice little clip of one of our caseworkers, Michael, talking about the work the Center is doing, or at least some of the work the Center is doing. Yes! And we're also going to answer an email from a younger listener. Let me try. That raised a couple such interesting topics that we're going to spend the whole episode on this one email before the portfolio reviews. And so without further ado. Here I go once again with the email.

Mostly Voices [3:33]

And first off, second off, last off.

Mostly Uncle Frank [3:41]

First, second, and third off, we have an email from Miranda. And Miranda writes, hi Frank, Happy July.

Mostly Mary [3:48]

My husband and I are 32 years old and planning to retire at 33. If you are not familiar, this movement is called FIRE, Financial Independence, Retire Early. Inconceivable. I'm trying to figure out what my portfolio allocation should be in FIRE and would love to hear your thoughts. The data：portfolio size $2.2 million, SWR 3.4% or $75,000, fire date approximately one year from today, current composition 50% real estate equity, long-term rental properties in Austin, no primary home, and 50% stocks, all Vanguard ETFs, 60% US, 40% international. future composition, 50% real estate, and question mark. To consider, since I'll be retiring in a recession to avoid sequence of returns risk, I plan on having a five-year cash cushion held in a money market fund. The amount needed in that account is annual spend $75,000 minus dividend payments question mark minus real estate cash flow approximately $10,000 equals the amount I'd have to sell to reach my annual spend. I take that number times five to get the cash cushion. Therefore, while I don't want to get out of stocks entirely, I'm looking to mix my stocks with an asset or two that produces higher than normal dividends without compromising the earning potential of the portfolio. Ideally, the assets would grow at 6% after inflation. Do any such assets come to mind? Do you have any specific tickers you'd recommend? A complication. Having high dividend assets in my portfolio now would actually hurt me from a tax perspective. So, where do I put the money I plan on investing in this asset or these assets for the next year? Finally, please feel free to call out any gaps in my strategy that perhaps I didn't ask directly about. For example, should I consider selling some real estate even though it has historically been the the primary driver of my net worth. Thank you for all the support and educational content you've created. Best, Miranda.

Mostly Uncle Frank [6:03]

Alrighty, the first part of your email says, if you are not familiar, this movement is called FIRE, Financial Independence, Retire Early.

Mostly Voices [6:16]

And am I familiar with that? Since before your sun burned hot in space and before your race was born, I have awaited a question.

Mostly Uncle Frank [6:25]

Well, Miranda, it's time for you to pull up an easy chair. This may take a little while. So let us talk about this fire movement and all of its various attributes. The good, the bad. The ugly. Now most people in the modern fire movement, particularly people of your age, are under the impression that this is a new and exciting tree that they found growing in the forest. They've been spending a lot of time on that tree. And that's kind of a misperception. And the misperception is this, that is not a new tree in a forest. That is a new branch on a very old tree in the forest. And from time to time, about once every generation, a new branch grows on this tree. But oftentimes the people on the branch are too busy looking at the leaves on that branch to recognize that there is a tree and that there are many other branches on the tree. But when you get to a certain place in your fire journey, fire, fire, fire, you need to stop looking at the leaves on your own branch and start looking at the bigger tree and start looking at the other branches of the tree because then you're going to learn a lot more about what this is about and how it fits into the rest of life. Now I have a specific approach to learning about anything. And from my perspective, the only way to really understand anything in a comprehensive way is to know what the history of that thing is, the history of this idea, the history of fire. You need somebody watching your back at all times. So let's just talk about this branch first. This branch started growing probably around 2005 to 2008. If you go back to things like J.D. Roth and in particular Jacob Lund Fisker and early retirement extreme from that era. This is before Mr. Money Mustache, this is before Choose FI, this is before Quit Like a Millionaire, which seems to be very popular for you. This is before Go Curry Cracker. And Jacob's focus was largely environmentalism. and minimalism expressed through frugality and then expanded to the practical application of that both through frugality and through investing. And so if you have never read Early Retirement Extreme, I would go and read that. Bear in mind though, it's written by a physicist. It's not written for popular consumption, even though I have had our children read it. I went to visit Jacob Lund Fisker once, I think it was 2014. He lives in a suburb of Chicago, and he had a nice little pug dog named Frank, who unfortunately I don't believe is with us any longer. But he's a very introverted guy who has a very nice garden and likes to build things. In addition to being a world-class physicist, The best, Jerry, the best. And so there was a bulletin board attached to Early Retirement Extreme. I think it's still there that I and many others participated in back in around 2010 beginning. And there were a lot of interesting people there, but not people who wanted to be popular or put themselves out there in terms of lots of content production. One of those people was Tyler who came up with the website Portfolio Charts and the Golden Butterfly Portfolio that we talk about a lot here. That is a core + phi idea on this branch. But subsequent to that, around that time you also saw the growth of money mustache, which popularized a lot of this stuff. Go Curry Cracker, whose blog was very popular, say between 2013 and 2018 or 2019 blogs just aren't as popular anymore as a medium. But then you really got to the explosion of the popularization of Fi and Fi ideas when Brad and Jonathan started the 2Z5 podcast. And I remember in one of the first months I contacted them and said, this is actually what this movement needs is people that sound a little bit more normal than us nerdy Engineer types fiddling around with spreadsheets. They were using it planners, especially since 95 of us seem to be of the male persuasion. But through the power of the internet and social media and all the good work that those guys and a lot of other people have put in, it has become a very popular movement that is recognized now by the popular financial media. Unfortunately, now it has become kind of infected with a lot of the drawbacks of popularity. So there is a certain amount of dogma and sloganeering that goes on in this movement now that's not very healthy. And there's also a kind of competition that's not very healthy, which is expressed as trying to have the highest savings rate when you're accumulating and then trying to have the lowest safe withdrawal rate when you're decumulating. Neither of those are healthy practices. Not gonna do it.

Mostly Voices [12:13]

Wouldn't be prudent at this juncture.

Mostly Uncle Frank [12:17]

But now let's talk about the other branches and the tree really that this sets on. I wrote an essay, fortunately on a dormant blog that I still have, and I will link to this in the show notes. I wrote this in March of 2016, so over seven years ago, and the title of the post is what Was Old Is New Again：the Modern Counter-Culture of Frugality. I mentioned on it what were the most popular Fy-related authors and posters at the time, which included Mr. Money Mustache, the Frugalwoods family, the Go Curry Cracker team, Jacob Lund Fisker of Early Retirement Extreme, Jake Delsillas of the Voluntary Life, and the Root of Good family, and of course the Mad Fientist. But then we go back to talking about the origins of what this tree is that they were growing this branch on. And some of these sources are things like the autobiography of Ben Franklin. Two of the other ones are Thorow's Walden and the works of Ralph Waldo Emerson that we like to cite around here. On another branch you'll find youd Money or youe Life. You'll also find a book called Small is Beautiful by E.F. Schumacher, an economist. Earlier on, you'll find things like How I Found Freedom in an Unfree World by Harry Brown, published in the 1960s. And then you'll also find other sort of random things floating around like vagabonding by Ralph Potts. And yes, I have read all those things. Surely you can't be serious. I am serious. And don't call me Shirley. A lot of what's at the core of this is just the idea of thinking independently. and not following popular trends, particularly in consumerism. Although fame culture is also a problem. One of the more interesting lineages I found in youn Money or youe Life is what Vicki Robin calls the parable of the ham. I'll just read it to you. One day a young girl watched her mother prepare a ham for baking. At one point the daughter asked, Mom, why did you cut off both ends of the ham? Well, because my mother always did, said the mother. But why? I don't know. Let's go ask Grandma. So they went to Grandma's and asked her, Grandma, when you prepare the ham for baking, you always cut off both ends. Why did you do that? My mother always did that, said Grandma. But why? I don't know. Let's go ask Great Grandma. So off they went to Great Grandma's. Great Grandma, when you prepared the ham for baking, you always cut off both ends. Why did you do that? Well, Great-Grandma said, the pan was too small.

Mostly Voices [14:56]

That is the straight stuff, O' Funkmaster.

Mostly Uncle Frank [15:01]

Now, where does that idea actually come from? This was written in the 1990s. This actually comes from Emerson's essay, Self-Reliance, because what they're talking about is somebody having a foolish consistency and just doing the same thing over and over again because that's what they did in the past or that's what somebody else did in the past. So if you don't want to live that way, you have to stop following those sorts of things. The problem we're getting to in the modern fire movement is that people are now substituting new rules about hams fitting in pans that don't really have any pedigree. They're just easy to remember and easy to apply. We'll get to those. Now let's go back and stay, say, in the 19th century, from a book called the Art of Money Getting by P.T. Barnum, written in 1880. Here's a passage from that：My good woman, you will not get ahead in the world if your vanity and envy thus take the lead. In this country, where we believe the majority ought to rule, we ignore that principle in regard to fashion, and let a handful of people, calling themselves the aristocracy, run up a false standard of perfection. And in endeavoring to rise to that standard, we constantly keep ourselves poor, all the time digging away for the sake of outside appearances. How much wiser to be a law unto ourselves and say, We will regulate our outgo by our income, and lay up something for a rainy day. People ought to be as sensible on the subject of money getting as on any other subject. Like causes produces like effects. You cannot accumulate a fortune by taking the road that leads to poverty. It needs no prophet to tell us that those who live fully up to their means, without any thought of a reverse in this life, can never attain a pecuniary independence. Forget about it. Now, if you go back even further, and I link to a nice little video called the Quiet Life by Alan Botting, about where this really goes back to, which actually is the ascetic movement that was followed by monks of various persuasions, including going back to China in the third century, people who wanted to live simply and appreciate life that way. And you also go back to the ancient Greeks and Romans who had their own threat of this stuff that extends from Diogenes of Sinope or Diogenes the Cynic who lived like a beggar most of the time and was always telling people to f off.

Mostly Voices [17:48]

I have officially amounted to jack you squat.

Mostly Uncle Frank [17:59]

Interestingly enough, he was kicked out of Sinope originally for debasing the the currency. Did you realize people have been complaining about the value of their currency going down for over 2,000 years? Well, they have. That's nothing new either. But anyway, that thread of philosophy eventually led to stoicism. And then you read things like Seneca, who's on the opposite end of the economic spectrum. He was one of the wealthiest people in Rome. But he also philosophically tried to separate himself from his wealth. by doing thought experiments about losing it all. So really what this goes back to is a philosophy of separating the self from the physical things that one might have or possess. The modern fire movement is actually at another crossroads that have been passed many times before by many other people, which is this：Many people have taken the idea of well I won't spend all my money on stuff or I won't fixate on having stuff and I'll have a lot more money. The problem with that gets to the fact that you are just substituting money for stuff then. And while money is better than stuff because it's liquid and more flexible and you can do a lot more with it, including grow it.

Mostly Voices [19:15]

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.

Mostly Uncle Frank [19:25]

It's still a thing that somebody can get fixated on, particularly if you've been saving for a long time. That is why we see today a lot of five people who have made it have trouble spending. And the main withdrawal strategy that a lot of these five people have is, in fact, don't spend money. Their withdrawals rates are so low or at zero, that they don't really need a withdrawal strategy. And a couple of good examples of that, and frankly it's good that people are recognizing that this is another problem to be dealt with. We have Mindy and Carl Jensen, who appeared recently on Ramit Sethi's podcast, and I'll link to the video in the show notes, it's worth watching. And they have over $4 million and they are struggling spending it. Carl needs to sell some of that Tesla stock and just buy the stupid car so he can go race Mr. Money Mustache.

Mostly Voices [20:21]

down the quarter mile of death in their 7,000 horsepower nitro burning suicide machines. But they're working on it.

Mostly Uncle Frank [20:29]

Another person who has recognized that they have this problem is Brandon the Mad Fientist, who has also talked to Maramitzke a couple of times. I'll see if I can link to that podcast as well. And after being five for a few years, he realized he wasn't spending any money and it's like, well, what's the point of accumulating all this? I need to get on with my life and do a better job of that. And he's working on it. One of the more interesting things that has come out of that recently is that he teamed up with Nick Maggiulli, who is just a guy from the finance world, who wrote a book called Just Keep Buying. It's a pretty good accumulation primer about ways you can spend more money in retirement and why you may not be wedded to the 4% rule if your spending is flexible. What was most interesting about that blog post, I'll link to that in the show notes as well, is not the blog post itself, which is obviously an absolutely correct, even though he really hasn't expanded it to include a better portfolio. But what was most interesting to me was the reaction to it, because you can see there's still a group of people that are really wedded to not and looking for any reason not to spend money. And so when they get confronted by this, they experience cognitive dissonance and they get really mad about it and try to find things that are wrong with it. Now here at Risk Parity Radio, it's always been our goal to be able to spend more money in retirement and constructing better portfolios to allow you to do that. is one of our main goals. Yeah, baby, yeah! But that does rub a lot of people the wrong way. If you want to listen to more about the conflicts of that and the issues there, go back and listen to episode 209. Thankfully, and hopefully, this is changing as the people in today's fire movement on this newer branch of the old tree are learning what people on the other branches learned many decades and lifetimes ago.

Mostly Voices [22:42]

I haven't taken leave of my senses, Bob. I've come to them. From now on, I want to try to help you to raise that family of yours, if you'll let me. Well, we'll talk it over later, Bob, over a bowl of hot punch. Meanwhile, you just go and put some more coal in that fire, and you go straight out and buy a new coal scuttle. Isn't you do that before you dot another I, Bob Cratchit? I don't deserve to be so happy. I can't help it. I just can't help it.

Mostly Uncle Frank [23:38]

All right, now let's go take a look at one of the specific branches of this tree. This is the one that grew in the generation before the one that you are on right now. And I pulled this book off my shelf because I think it's very useful. Let me first read you the blurb on the back, which says, In our society, it's considered normal to work during the best years of our lives. You work when you're young, healthy and vital. You work when your mental powers are sharp, your mind inquisitive. You work when you still have a family at home and your kids need you the most. You give the best years of your life to a career and the last few years to yourself. Are we crazy or what? You don't have to resign yourself to that fate. With my plan, you can live the rest of your life without earning another dime. You let your equity sweat for you, and this book tells you how to do it now. And the author is Paul Terhorst. Now, this book sounds like it was written in the past couple years, doesn't it? Isn't what I just read exactly what the fire movement espouses? In fact, is the fire movement any different from what I just read? Not really. Not really at all. So what is this book? And who are these people? This book is called Cashing In on the American Dream：How to Retire at 35. At 35. Now you're 33. It's just talking about 35 by Paul Terhorst. When was this book written? This book was written in 1988, 35 years ago, before you were born. The very existence of books like this proves that the fire movement is nothing new. We just have better technology today to implement it.

Mostly Voices [25:30]

I see no reason for answers to be couched in riddles. My answer is simply as your level of understanding makes possible.

Mostly Uncle Frank [25:42]

So this book was written before your money or your life, but it's in the same genre. It's in the same generation, if you will. Interestingly enough, that little movement at that point in time really did not take off. So only people like me who were beginning their careers in the early 1990s might have read something like this. What's perhaps more interesting is what happened after this book. So Paul Terhorst and his wife Vicki retired in 1985 before writing this book and they are travel nomads. They've lived all over the world. They are still living all over the world. I think they're currently living in Mexico. They've lived in Asia. They've lived in Argentina. They've done all of those living all over the world stuff that people think is new and different now. And they still have a blog with pictures and stuff. I'll post to that in the show notes so you can check that out. They look very healthy for their ages. They're not spring chickens anymore though. So they've been retired for almost 40 years, living off their assets. And that's the next thing we need to get to, because we're going to be talking about your strategy or your proposed strategy, which is based on what's popular now. Let's talk about what was popular then, because the real differences that you see if you go and read earlier versions and look at other branches on this tree. For a lot of them, whatever the financial strategy is, is based on what was popular at that point in time. And what was popular at that point in time in the 1980s, what was popular then for early retirees is buying CDs. Why? Because CDs were paying 8% or more. You could get really good returns out of CDs. We're back up to five right now. That's probably not sustainable. Could be, but it's probably not. But at that point in time, it was possible simply to put all of your assets into a high yielding CD and ride off into the sunset. That's also why this is the strategy that was suggested in your money or your life. Now, did they stay with that strategy? The answer is no. If you're familiar with the way the Tur Horse actually lived, they had to change their strategy because that strategy, because it was designed and popular at that particular time, stopped working. It was not a long-term strategy based on a lot of long-term data. And so what they ended up doing is pretty much what most people do is invest most of their money in the stock market and keep enough to live on. And as far as I know, they've never published the details of that, but they've converted to that sometime in the 1990s and have been living on that ever since. I should say their burn rate is very low. probably well below 4%. But here's what I want you to learn from this. The people who are most involved in these kind of movements typically are not good places to go to to really learn personal finance. You do have to go to the finance world to learn that stuff. So what people in the FIRE community and people did back in the 1980s is sort of look around, find something simple that they could work with, and just go with that. But then they become too wedded to that, and they never look beyond that to see whether that is a good strategy for a very long period of time, as opposed to what is just good for that particular era. And the ones that do succeed tend to have to abandon what is popular at a particular time because it's not well thought out. We're going to get to this when we get to your proposed strategies, which seem to be based more on what is very popular right now and in the past 10 years, just like what the Tour Hurst were talking about was very popular and usable around 1990, but stopped being useful because it was never designed for decades and decades of time. and what that tells you is using popular fire books as the basis for a long-term strategy without reference to people from the industry who really know what they're doing, like when the Mad Fientist just went and talked to Nick Maggiulli is probably not a good idea either. One of the reasons that this podcast exists is to get us away from popular ideas that are not well backed up with academic and other research and use what the professionals use and use the best ideas with the longest staying power as the basis for constructing portfolios and living off them. So now it's time to get to that. But before we get to that, I just forgot one thing in my notes here, which is a reference to James Allen. Now, James Allen was somebody who lived in England around the turn of the 19th to 20th century, so around 1900. And he retired from being a clerk when he was in his 30s. Fortunately, he didn't live that long, but he did write a whole bunch of books and things from about the early aughts there to about 1911 that make good reading in their in the fire genre. They're also in the self-help genre, so be careful with them. One of them is called As a Man Thinketh, which is a classic written in 1903. But I have a whole anthology of all of his books that I got on Amazon for a pittance. And if you're interested in this sort of stuff, I would go back and read some of that, because a lot of it will sound very familiar in tone, if not in application. you'll find that on another branch of this tree along with that P.T. Barnum book and others.

Mostly Voices [31:57]

Guess when I went and got this little book. Guess when I went and got it. The same day I heard about it. I went and got it. Somebody says, well, Mr. Roane, does that make you different than most everybody else? And the answer is yes. Somebody says, well, why is that? We don't know. Oh, what do we know? You don't know, I don't know, nobody knows.

Mostly Uncle Frank [32:20]

All right, hopefully you haven't fallen asleep.

Mostly Voices [32:24]

I'm putting you to sleep. If you have, wake up.

Mostly Uncle Frank [32:28]

Let's start talking about your situation in particular. All right, first let's deal with this elephant in the room and the popular five problem that you have. I see that you've referred to a cash cushion. and you've capitalized that cash and cushion. You're also talking about dividend payouts. To me, this suggests that where you learned your idea of what you should do after you reach five is from the book Quit Like a Millionaire. That is a good example of a popular five book right now with a lot of good information in it, but some things that are just kind of made up for the current times. and are not things that you want to be emulating or using because they don't have a good foundational basis. Yield shields, cash cushions are two of those things. That does not mean that what they recommend in that book doesn't work. It works, but it does not work for the reasons they think it works. I don't think it means what you think it means. It works because they generally have a diversified 60/40 portfolio. That is the only reason that works. It has nothing to do with yield shields. It has nothing to do with cash cushions. In fact, those ideas are window dressing that will actually detract from the performance of a portfolio and are not good portfolio construction techniques. I just wanted to get that out of the way.

Mostly Voices [33:55]

Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys? Forget about it.

Mostly Uncle Frank [34:02]

Because this is a general problem with a lot of popular five books. They're superficial. They're just like that book from the 1980s recommending CDs. Yes, that was great for that period in time. The other thing people think is great for this period in time, because it is this period in time, in the past 10 years in particular, is people think that, well, all I need to do is hold lots and lots of stocks and then some amount of cash, whether you call that a cash cushion of $100 bills stuffed in a pillowcase or something else. That's a very popular approach these days as well. But again, that is part of these times. That is the approach followed by Jeremy and Go Curry Cracker. They have like 90% in stocks. Fortunately, the period of time they've been investing has been 2012 until now. So they really haven't experienced any kind of big downturn. And if you don't have a big downturn, if you have a rare event like we've had for the past 10 years until last year, you can get away with that. To his credit, they have been spending about 4%, not always 4%, but that's been their goal and target. But you can also see where this became a problem last year. and it was mostly psychological, but he actually went back to work last year towards the end of the year. And I have to believe that wasn't just an experiment. That was a fear reaction to having a mostly stock portfolio take the kind of dive that it did in 2022. The point being here is that since you want to have looks like a 50-year retirement, you should be thinking about 50 years of market performances at least. And whatever system or portfolio you come up with, you need to go figure out how would this have performed in the 1970s and how would this have performed in the early 2000s because those are the two worst periods. And if you haven't done that, you haven't done enough work, you haven't done your homework. The good news is We can do this now. We have the tools, we have the talent. We have the tools, we have the talent. It's not that hard. You just need to sit down and do it using the calculators that are available online. In particular, Portfolio Visualizer and Portfolio Charts. And if you're okay with spreadsheets, I would also use the one at Early Retirement Now, the toolbox that you need to download. That one's a bit more tricky to use. But we talked about an application of that back in episode 223 of a risk parity style portfolio with a 5% safe withdrawal rate over a 100 year period. All right, now let's get into more of your specifics here. In order to analyze your portfolio, the first place I like to go is Portfolio Visualizer. And I've done that with your stuff and we'll be posting a few links in the show notes so you can check this out. We're using the Monte Carlo simulator, but it also has a financial goals function to allow us to add in, for example, the rent money you're receiving over time and then analyzing what a portfolio like the one you propose to hold is likely to do in that period of time. That period of time being a 50-year analysis. But the first problem you have is one of simple accounting. which is you are effectively double counting your real estate assets. Now, when you have an asset like that, which appears to be worth $1.1 million, you can either account for that in terms of I'm going to sell that, invest it in other things so I can live off of it, turn it into something that's liquid, or I'm going to leave it as illiquid. And if it's illiquid, then you don't care about how much it's worth for the purpose of these kind of calculations. What is important is the income you're getting off of it, which you say is $10,000 a year. Frankly, that's not a whole lot of money for a $1.1 million real estate portfolio. And I'm not sure whether that is an accurate number or what is going on there, or maybe you just have a big mortgage. But all I'm saying is that if you are accounting that as an income source, then you need to take it out of this analysis we're going to do in terms of the safe withdrawal rate, which means you actually only have $1.1 million of money to live on. You don't have 2.2. If you want to have 2.2, you would need to sell the real estate. then you would have 2.2 and you could distribute that amongst other assets and then apply a safe withdrawal rate to that. But the proper way to look at it when you have an illiquid asset that's generating income that you do not plan to sell is to simply subtract the income, the annual income of that from your expenses. So in this case you're looking at your $75,000 of annual expenses your income from that is 10,000 leaving you $65,000 that needs to be covered by your investable liquid assets. And those investable liquid assets are $1. 1 million of assets based on what you've told me. Now you've said you're in 60% US, 40% international, and then you wanted to have what you call a cash cushion. and when I calculated what your cash cushion would be, it's going to be about 30% of your $1.1 million of investable assets. So we use that as your allocation to cash. 30% of your investable money is invested in cash because that's what you're talking about when you're talking about a cash cushion. And that's why we should not be labeling things cash cushions or other things. Cash is not special. Cash is just another allocation in your overall portfolio. We don't call the accelerated in your car a go pedal. We don't call the brake a stop pedal. We don't call your allocation to cash a cushion or anything else. It's just cash and it's an allocation to cash and the only question is how much are you allocating to that? In your case, based on what you've said, you want to have a cash cushion that is about 30% of your assets. So we start with that as your cash allocation, then you want to do 60/40 with the rest of it all in stocks. So what that ends up being is a portfolio that is 42% in US stocks, 28% in international stocks, and 30% in cash. I should also say when we're talking about cash, we're talking about CDs, money markets, savings accounts, all those sorts of short-term things. What you're actually invested in with those things is actually not that important. What's important to recognize is that it is an allocation to cash and it is something that you need to factor in to your portfolio as an allocation to cash.

Mostly Voices [41:25]

Did you get that memo?

Mostly Uncle Frank [41:29]

So I put in all of this information into the calculator at Portfolio Visualizer. We have a 50-year retirement. We have $10,000 of income coming in. that we've increased by 3% per year for increasing rents. Then we have $1.1 million of liquid investable assets in this portfolio that's 42% in US stocks, 28% in international stocks, 30% in cash, and we want to be taking $75,000 out of this total over a period of 50 years. All right, now what happens when we run this through the Monte Carlo simulator. Well, we find out the results are not very good, as you might expect, because this is essentially a withdrawal rate of close to 6% that you're contemplating taking out of this thing. And so in the Monte Carlo simulator, it survived only 27.25% of the time. But let's look at the performance summary of the simulator to see more details of this. What you see, and this is a simulator that goes from sort of the worst randomized outcome to the best randomized outcome. The worst randomized outcome is you run out of money, and that is true for about three-quarters of the simulations. In the best case scenario, you'd have $15 million or over $15 million. even after the withdrawals. So it's useful to look at what they call the 10th percentile, and that is a good estimate of what the real safe withdrawal rate of this thing is. And it's got the safe withdrawal rate on right on this printout, which you can see when you go to the link. Safe withdrawal rate at the 10th percentile, this is 2.97%, what they call the perpetual withdrawal rate, which is holding the thing forever, is 2.28%. Now it does do all right on average. If you look at the 50th percentile, the safe withdrawal rate for this would be 5.06% and the perpetual withdrawal rate would be 4.46%. Unfortunately that's still not good enough for how much you're taking out of this thing in the simulation because your withdrawal rate is really about 5.9%. It's not anywhere near 3.4%. Well how can we improve this situation? There are basically three levers you can pull. One is to change the construction of your portfolio to increase its safe withdrawal rate. Another one is to change the base safe withdrawal rate from 5.9 to something less, which you're probably going to have to do. And then the other would be to do variable withdrawals. This is not considering variable withdrawals. This is considering you withdrawing more money every year based on inflation, which nobody actually does. So these are conservative estimates on that score. If you do in fact do variable withdrawals, your safe withdrawal rate is going to generally be between 0.5 and 1% better. But before we get to some better ideas as far as a portfolio is concerned, let's talk about why the portfolio you're proposing using is probably not a very good one. The first reason for that is you got way too much cash. Didn't you get that memo? It's not a cash cushion when you put that much cash into a portfolio, it becomes a cash drag. And if you do simulations, you'll find that it begins to drag on a portfolio over long periods of time if there's more than about 10% in the portfolio. You can live with up to 20% if it's in at least some shorter term bonds or something. But 30% of cash in a portfolio stuffed into a pillowcase and calling it a cushion is not a good idea. It doesn't work.

Mostly Voices [45:28]

And I'll go ahead and make sure you get another copy of that memo, okay?

Mostly Uncle Frank [45:32]

What do I mean when I say it doesn't work? There is an illusion now going on in the FI community. that all you really need to do to deal with sequence of return risk is survive three to five years of bad times. Slender, you're the devil. It's always the one you least suspect. That's false. That is a false premise. The reason people have this illusion, I believe right now, is because we have not had a very bad downturn for over a decade. So people coming into this space now are looking at, oh, 2020, that went by pretty quickly. What we just experienced is going by pretty quickly. Unfortunately, the downturn, the sequence of return risk you need to deal with is a 10-year plus downturn. We're talking about the 1970s or the early 2000s. So whatever you construct, three to five years is not good enough. That is like waiting across A river when you can't swim and they say the average depth is four feet. Well, you're going to hit some 10-foot drops in there and you're not going to survive.

Mostly Voices [46:44]

You're not going to amount to jack squat.

Mostly Uncle Frank [46:47]

So coming up with some kind of cash cushion that's supposed to get you past three to five years is not historically good enough. And it's not something you should be taking any comfort in and it's not something you should be using. It's bad advice, pure and simple.

Mostly Voices [47:03]

Watch out for that first step, it's a doozy.

Mostly Uncle Frank [47:08]

How do you actually solve for a sequence of return risk that is longer than five years? You solve for that by diversifying your portfolio better than it is, not with piles of cash.

Mostly Voices [47:19]

Forget about it.

Mostly Uncle Frank [47:23]

And I should say that dividends and yield shields aren't going to help you there either. And the reason is because those come out of the total returns of what you're doing. They don't get added on to the rest of your returns. So what you should care about is the total returns of your investments. Do not fixate on dividends. Do not use dividends as the basis for any decision about your investing. And go back to episode 270 to learn more about why that's not a good approach, including several videos. from people in the actual finance arena, not fire people, who can tell you why that's a bad idea. So what does a better portfolio with a better safe withdrawal rate look like? Well, let's take a look at the Golden Butterfly, which is really an OG fire portfolio. No more flying solo. Given that it comes from Tyler, whom I met back on the boards of early retirement extreme, before he had invented portfolio charts. And it was after doing lots and lots of analysis that he came up with a golden butterfly portfolio around 2015 or 2016. So that is one of our sample portfolios. It is 20% in a total stock market fund, 20% in a small cap value fund, 20% in long-term treasury bonds, 20% in short-term treasury bonds, which are like your cash, and then 20% in gold. Now that's still got a lot of cash in it, but not 30% in cash. And it's not all in very, very short-term things. Some of those short-term bonds go out to three years. But what happens when we take that portfolio and put it into this scenario? where you're still trying to get to a 5.9% safe withdrawal rate with $75,000 of expenses, $10,000 in rent, and then your portfolio needs to cover the other $65,000. So I run this through Portfolio Visualizer, and I'll link to this in the show notes separately, so you can play with all these things. This has a success rate of close to 40%, 39.6%. So significantly better than what you were working with before. If you look at that 10th percentile on the performance summary and compare it with your portfolio, this one has a safe withdrawal rate of 4.33% versus the 2.97% you had in a perpetual withdrawal rate of 3.98% versus the perpetual withdrawal rate of the 2.28% that you had. So it's a much better portfolio, especially if you're thinking about a 50-year retirement. Now why is it a much better portfolio? For a few reasons. First, it doesn't have so much cash in it. That's not a cash cushion, that's a cash drag. Did you see the memo about this? Second, the stocks are better diversified. Now diversifying between the Domestic and international is one thing, but it's not a great thing. It's kind of sort of maybe. I know it's popular, but when you run it through the simulators, it doesn't do all that well. It doesn't do all that well in comparison to something that's actually diversified, and the best way to diversify is to use factors. Here we take a small cap value fund.

Mostly Voices [50:52]

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

Mostly Uncle Frank [50:56]

and pair that up with your total market fund. And you'll notice we only have 40% stocks in this thing. We have 40% stocks in this thing. You have 70% stocks in yours and this one performs better. Think about that. You're not getting better performance out of having more stocks in your portfolio. You're getting worse. The other diversifier we have in here is treasury bonds. Long-term treasury bonds. You want long or intermediate term bonds because those are actually the most diversified asset from your stocks in a portfolio. If you don't have any, you get less diversification, you get a lower safe withdrawal rate. It's that simple. And then what about this gold? If you have gold in a portfolio or some other alternatives, that tends to diversify the portfolio further, give you a higher projected safe withdrawal rate. And that's been tested over a hundred years. Go back to episode 40 for a discussion of that. Now it's probably a little bit heavy on that. Usually 10 to 15% is a better amount to put in a portfolio to get the kind of diversified results you need. Okay, so what if we tweak this portfolio a little bit more? We decrease the gold in it, we decrease the cash in it, we add some more stocks in it. We build something like what we call the Golden Ratio Portfolio, which is another one of our sample portfolios. And to make it in its simplest form for the analysis purposes, I made it 21% in total stock market, 21% small cap value, 26% long-term treasury bonds, 16% gold, and 6% in cash. Because you do probably want some amount of cash. and I ran this through the same simulator with the same parameters, same withdrawals that you had before, and now we can look at the results. Now this one has a fighting chance of actually living up to the standards that you're trying to impose on a withdrawal portfolio. This one actually succeeds 62.14% of the time. It succeeds over twice as much as the one that you're proposing using. And if again, if we look at this 10th percentile, which is basically at the conservative end, the safe withdrawal rate for this one is 4.7% versus 4.33% for the Golden Butterfly versus 2.97% for what you are proposing. We look at the perpetual withdrawal rate. We have 4.68% for this Golden Ratio style portfolio versus 3.98% for the Golden Butterfly. versus 2.28% for what you're proposing. So this would also be a much better choice than some portfolio that is some total US stock market fund, some total international fund, and some pile of cash. Now it still doesn't solve your overall problem is that you need more invested assets to support this level of spending. What you really need in this circumstance would be about 1.625% in investable assets that would cover the $65,000 at a 4% withdrawal rate or 1. 875 would cover the entire $75,000 at a 4% safe withdrawal rate. Now, if you do want to cover the entire $75,000 at a 3.4% safe withdrawal rate, you do need to have $2.2 million in invested assets. It can't be stuck in a real estate investment. But you have many good solutions for that. You could just wait, your portfolio is going to grow in a few years. You can adjust what you're doing on the real estate side, find a way to get more rent money out of it. You have a lot of good solutions there. You're just not quite ready yet. But more importantly, I think you need to toss out some of these modern fire tropes from people who are not schooled in the financial services industry and are not using up-to-date calculators like this one, like the one at Portfolio Charts, which you should also run any portfolio through so you can see how your proposal would perform back in the 1970s. And please do go listen to episodes 1, 3, 5, 7, and 9 of this podcast to really get you in a framework where you understand portfolio construction from a bottom-up basis. because it has nothing to do with most of what is popular in the fire movement these days. And just like the way CDs failed for those fire people back in the 1980s, I think the proposals being made, lots of cash, lots of stock holdings, and things like yield shields are actually not likely to be good ideas within the next 10 years. usually what worked well in the past 10 years is not the best strategy for the next 10 years. So what you're really looking for is something that is a decent strategy even in the worst times, and you're only going to get there if you have a better diversified portfolio, like one of the portfolios we talk about here. Of course, the other solution is just don't spend money. That always works, and I do Take note of what popular personalities are actually doing with their portfolios. And in most cases, the actual solution that they are adopting is not spending money. If your withdrawal rate is less than 3%, you can probably get away with holding anything from 30% stocks to 100% stocks. But the reason your portfolio is working in those circumstances has nothing to do with its construction or any of the window dressing you put around it, any bucket strategies or CD ladders or yield shields, cash cushions, any of that stuff. That's all window dressing. It doesn't really matter. I have the memo. What matters in the circumstance of a lot of people is that they're just not spending very much money, in which case whatever they're doing probably works just fine. It's probably more complicated than they need, but it works just fine. And if you don't mind working a few more years, you could be in that circumstance too, because you've already accumulated lots and lots of money. You're still very young. You have lots and lots of different options here. Now you also asked about specific fund choices. I don't think that's very much of a challenge after you figure out what asset classes you want in your portfolio. So for instance, I'm talking about small cap value funds. Vanguard has a couple of them. VIOV would be good. There's another one called AVUV that's good. Vanguard has a long-term treasury bond ETF now, an intermediate one, and a short-term one. And for the alternatives, we talk about a lot of those a lot of the time. when most of them are somewhere in our sample portfolios. If you wanted to check out a gold fund like gldm or something like that. Anyway, it's really not specific fund choices that are going to drive what you're doing in terms of Investments. We have lots of good, inexpensive funds to choose from now. What you really want to do is figure out which asset classes you want and then just pick funds that go with those asset classes that are index based and have relatively low expense ratios. And I suppose it's a real important question. What are you planning on doing with yourself when you're done making money? However, you're making money now. And I think a lot of the people who seem to be doing this the best are often just working in something that they like working in a lot more and not working so much. Maybe I have a couple of friends that you might want to check out. One is Gwen Mirrs and one is Diana Miriam. Gwen fired and then defired and decided to go back into the workforce, but she found a working situation much more to her liking than what she had had in previous positions. And it's basically just Coast Fi. Diana is also Coast Fi and really not working that much. She does some work on the optimal finance daily podcast. podcast, which you should check out, and she also runs the economy conference. But that is really a passion project for her. But those two are closer to your age and experience and probably have more to say about what might be nice to do next than some gray-haired old guy sitting in an easy chair.

Mostly Voices [59:44]

Snooze and dream, dream and snooze. The pleasures are unlimited. Another person you might want to check out is a friend of Diana's.

Mostly Uncle Frank [59:52]

Her name is Rose Loundsberry, and she has a blog about simplicity and minimalism. Anyway, those are just a few extraneous ideas, and I probably talked your ear off much longer than you expected or maybe wanted. Looks like I picked the wrong week to quit amphetamines.

Mostly Voices [1:00:12]

But I do thank you for your email and bringing up these topics.

Mostly Uncle Frank [1:00:16]

'Cause I've talked about them in different places before, but probably not all in one place. And it's good to have an episode that has a lot of things like this all in one place. So thank you again for your email. Bow to your sensei. Bow to your sensei. Now we are going to do something extremely fun. And the extremely fun thing we get to do now is our Weekly portfolio reviews of the seven sample portfolios you can find at www.riskparriaradio.com on the portfolios page. It was all wine and roses out there this week. Fortune favors the brave.

Mostly Voices [1:00:55]

The one thing that's really notable is that the value of

Mostly Uncle Frank [1:00:59]

the US dollar versus other currencies has been falling. And when that occurs, it's usually good for most assets priced in dollars. including most of the funds we talk about here. We had the exact opposite going on last year. But looking at these markets, the S&P 500 was up 2.42% for the week. The Nasdaq was up 3.32% for the week. Small-cap value, represented by the fund VIoV, was up 3.12%. Gold was up as well. It was up 1.49% for the week. Long-term treasury bonds, represented by the fund VGLT, were up 2.3% for the week. REITs represented by the fund REET were actually a big winner last week. They're up 3.61%. Commodities represented by the fund PDBC were up 2.97%, probably on that weak dollar. Preferred shares represented by the fund PFF were up 0.85% for the week. And the loser was Managed Futures, which is betting on the dollar these days. Our representative fund DBMF was down 0.76% for the week. Now moving to these portfolios, first one is a reference risk parity portfolio called the All Seasons Portfolio. It's 30% in stocks and it's got 55% in intermediate and long-term treasury bonds, and the remaining 15% in gold and commodities. It was up 2.28% for the week, it is up 7.52% year to date and down 1.14% since inception in July 2020. Moving to our three kind of bread and butter portfolios. First one is this golden butterfly. It's 40% in stocks divided into a total stock market fund and a small cap value fund. 40% in treasury bonds divided into long and short and 20% in gold. It was up 2.07% for the week. It's up 7.54% year to date and up 15.31% since inception in July 2020. Next one is the Golden Ratio. This one's 42% in three stock funds, 26% in a long-term treasury bond fund, 16% in gold, 10% in a REIT fund, and 6% in a money market fund. It was up 2.35% for the week. It's up 9.3% year to date and up 12.4% 4% since inception in July 2020. Next one is the Risk Parity Ultimate. It's got 15 funds. I won't go through them all. It was up 2.61% for the week. It's up 10.28% year to date and up 4.27% since inception in July 2020. It owns a couple small Bitcoin funds that have been doing quite well recently.

Mostly Voices [1:03:52]

Fortune favors the brave.

Mostly Uncle Frank [1:03:56]

But we'll be talking more about those in another week or so when we rebalance it. Now moving to our experimental portfolios, these all involve leveraged funds and are quite volatile. So the first one is this accelerated permanent portfolio. It's 27.5% in a leveraged bond fund, TMF, 25% in a leveraged stock fund, UPRO, 25% in a preferred shares fund, PFF, and 22.5% in gold. GLDM. It was up 4.33% for the week. It's up 14.25% year to date, but down 12.92% since inception in July 2020. The next one is our most volatile and least diversified portfolio. It's also the best performer for the week. This is the aggressive 50/50, which is one-third in a leveraged stock fund, UPRO, one-third in a leveraged bond fund, TMF, and the remaining third divided into preferred shares and an intermediate treasury bond fund as ballast. It was up 5.14% for the week. It's up 16.38% year to date, down 19.37% since inception in July 2020. Things like that can move 20 or 30% in a year pretty easily and it seems to be on its way to doing that. Last one is our youngest one, the levered golden ratio portfolio. 35% in a composite levered fund, NTSX, that's the S&P 500 and treasury bonds, 25% in gold, GLDM, 15% in a REIT, O, 10% each in a levered small cap fund, TNA, and a levered bond fund, TMF, and the remaining 5% in a volatility fund and a Bitcoin fund. It was up 3.3% for the week. It's up 9.86% Year to date, but down 15.89% since inception in July 2021. And so just about like everybody's portfolios these days, no matter what they are, except for maybe Larry Swedroe's, these are recovering nicely. And as I said, we'll be talking about rebalancing four of them next week. But now I see our signal is beginning to fade. We've had extra hamsters running on the wheel today to keep this up longer. 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 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. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off. Scrooge was better than his word.

Mostly Voices [1:06:54]

He became as good a friend, as good a master, and as good a man as the good old city ever knew, or any other good old city, town or borough in the good old world. And a tiny Tim who he lived and got well again, he became a second father. And it was always said that he knew how to keep Christmas well, if any man alive possessed the knowledge. May that be truly said of us and all of us. And so, as Tiny Tim observed, God bless us, everyone.

Mostly Mary [1:07:42]

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.