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 [0:37]

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.

Mostly Uncle Frank [2:19]

But now onward to episode 288. Today on Risk Parity Radio, it's time for our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page. But before we get to that, we have a special treat, or at least it's a special treat for at least one listener. Shirley, you can't be serious. I am serious. And don't call me Shirley. Our listener Kevin sent us a three-page email, a tome. Okay, okay, okay, everybody, everybody, chill. And since he's also a generous donor to the Father McKenna Center, we are going to put him in an easy chair and go over his questions. Because at Risk Parity Radio, bribery will get you everywhere. Yes.

Mostly Voices [3:12]

And so without further ado, here I go once again with the email. And first off, second off, last off.

Mostly Uncle Frank [3:23]

First, second and third off, we have an email from Kevin. And it's so long we are going to break it up so you'll hear Mary reading part of it and then me talking about that part and go back and forth that way. I have people skills.

Mostly Voices [3:39]

I am good at dealing with people. Can't you understand that?

Mostly Mary [3:43]

And Kevin writes, Frank and Mary, you guys are awesome. What an oddly compelling show you've created.

Mostly Voices [3:51]

You're a legend in your own mind.

Mostly Mary [3:55]

I'm the dude from last month who quoted Neil Young and said I was gonna get around to writing a letter one of these days.

Mostly Voices [4:05]

And I'm gonna thank that old country fiddler. And all those rough boys who played that rock and roll. I hope this email finds you well.

Mostly Mary [4:21]

I'm pretty sure I have listened to every episode, many of them more than once.

Mostly Voices [4:26]

You're insane, Goldmember.

Mostly Mary [4:30]

So I apologize if I am asking questions you have covered elsewhere. Forget about it.

Mostly Voices [4:34]

A few times you've mentioned that your listeners are a random tiny cohort

Mostly Mary [4:38]

of people who enjoy this esoteric subtopic.

Mostly Voices [4:44]

You know, it's like there are certain kind of people who like licorice, you know, or certain kind of people who like buttermilk or something, you know, and it might not be something that everybody likes, but there are certain kind of people that really do like it.

Mostly Mary [4:55]

That kind of reminds me of Jerry Garcia's comments on fans of the Grateful Dead. Dead fans are like fans of black licorice. Not everybody likes black licorice, but the people who like black licorice really, really like it. Turns out a small, enthusiastic lot of us really like your show. Thank you for doing this.

Mostly Voices [5:20]

How can you explain this culture that has followed you? And they're so dedicated, they just are still after you. I can't explain it. They aren't the same people. I think that's the key to it. You know, there's a certain kind of person, you know, maybe in every generation. Thanks for answering my questions.

Mostly Mary [5:36]

I know this is a longish email, so thanks, Mary, for reading it.

Mostly Voices [5:44]

First off, back testing.

Mostly Mary [5:47]

A, withdrawal rates. On YouTube, in your long presentation on safe withdrawal rates, you reference Michael Kitces and say that, on average, most portfolios could withdraw 6%. I am trying to square this with the Monte Carlo simulation of Risk Parity Radio's model portfolios on Portfolio Visualizer, which generally show that the portfolios run out of money at 6%. This may be because of my competence level, or lack thereof, at using the Monte Carlo simulator on Portfolio Visualizer. You may very well award me no points. And may God have mercy on your soul. But hey, I try. One, can you please help your listeners slash me better understand and reconcile the different outputs of the same portfolio on Portfolio Visualizers A, Backtest Portfolio Asset Allocation versus B, the Monte Carlo Simulation? The SWR/PWRs on the backtest are consistently higher than what works on the Monte Carlo Simulation. Can you help me understand this discrepancy so I can make wise choices and not end up living in a van down by the river? I have officially amounted to jack you squat. If I look at the Monte Carlo simulation at the 50th percentile, the PWR is the same as on my backtest. But the SWRs are much different. I have no confidence that the same PWR is anything more than a coincidence. And it may be irrelevant. Is it? How do I learn how the SWR/PWR relate to one another on the backtest in Monte Carlo? If it is easier to explain, I have attached an Excel spreadsheet with the outputs both for SWR and PWR on my own portfolio, which I call Portfolio 1 on tabs 1 and 2, which I have constructed 100% since signing up for your class, beginning to listen to your podcast. Bow to your sensei.

Mostly Voices [7:55]

Bow to your sensei.

Mostly Mary [7:59]

The other tabs are my runs of the other portfolios from this show. I compare them to one another on the snapshot tab. I prefer Portfolio Visualizer versus Portfolio Charts because Portfolio Visualizer is precise, whereas there can be tracking error and variance from the asset class, so I am concerned portfolio charts can be quite off.

Mostly Uncle Frank [8:27]

Why do you seem unconcerned about this? All right, we'll stop right there for now and talk about back testing and Monte Carlo simulations. First, what you have to recognize is that a safe withdrawal rate is based on a worst case scenario. So if you're just looking at the historicals, which is how it was originally calculated, it's basically starting in the worst year possible what would have been the withdrawal rate for that year. So when Michael Kitces is saying on average most portfolios could withdraw 6%, that is looking at all of the years you could possibly start your withdrawals in. Because chances are you are not going to start in the absolute worst year, you're going to start in an average year. In which case, even the safe withdrawal rate for an ordinary kind of S&P 500 intermediate treasury bond 6040 portfolio, the kind that Bengan was working with originally, will give you like a 6% withdrawal rate. And that's what Kitsis is referring to. But now what is the difference between that kind of calculation and historical calculation or back test and a Monte Carlo simulation? What's going on in a Monte Carlo simulation is it is taking all of that data that was laid out in a specific order historically and then scrambling it up into thousands of different parameters, basically moving the years around and then measuring out, all right, if we randomize all this data and run all these simulations, usually it's like 10,000, what would be the worst case scenario if we had the worst years all lined up together, the worst sequence we could possibly imagine, if you will. And so when you run a Monte Carlo simulation, all of those things in the tail, like from zero to 10% success rate, that actually never happened and probably never will happen, but it is giving you an idea of, A possibility. And the same is true for the other end of the spectrum. Anything that's over the 90th percentile in a Monte Carlo simulation is also something that never happened and probably never will happen. And this is also why when financial advisors use Monte Carlo simulations, they are not looking for 100% certainty. All they're looking for is somewhere usually around 90% good enough because they know that that tail actually never has never happened. and probably will not happen. The other thing that you should recognize is that this is not actually measuring failure or the plane crashing as some people like to say. Oh, there's a 10% chance the plane will crash. Shayna, they bought their tickets.

Mostly Voices [11:14]

They knew what they were getting into. I say, let them crash.

Mostly Uncle Frank [11:26]

What it's actually telling you is what is the likelihood that you're going to have to change your withdrawals at some point. So this is not the probability of the plane crashing. This is the probability of the plane being delayed or being rerouted if you're looking for that kind of plane analogy. Stay in formation. Targets just ahead. Targets should be clear if you go in low enough. You'll have to decide. You'll have to decide. You have to decide. That's a good litmus test for knowing if you're talking to somebody who's overly pessimistic. They liken a Monte Carlo simulation to a plane crashing, which is just a bad analogy. That's not how it works.

Mostly Voices [12:11]

That's not how any of this works.

Mostly Uncle Frank [12:15]

Okay, now let's talk about what are good and bad uses of these kinds of simulations and back tests. Generally, the best use of Monte Carlo simulations and backtests are to compare two different portfolios in the same time period. Because all you're looking at there is, if I get to choose portfolio A or portfolio B, which one is better in terms of a safe withdrawal rate or perpetual withdrawal rate? And that gets away from looking at the absolute numbers. In order to look at absolute numbers, You really need to make sure that your backtest includes data from the worst periods that we know about. And the very worst period is the 1970s. Then the early 2000s is another really bad period. After that, you'd have to go back to the 1930s for another really bad period. The problem with that is there's limited data sources for that. And we were under a different monetary system at that point in time. It was a gold standard. with a devaluation in the middle of it, as opposed to the kind of floating fiat money standard we have right now. But that's also why you want to use multiple calculators to do these comparisons, because they have different data sets in terms of breadth and of depth or length. So whatever you're running, you want to try to run it at Portfolio Visualizer, which is going to give you a broad exposure with lots of different asset classes or even funds you can put in there. Then if you look at portfolio charts, you're going to have fewer inputs, but you go back a bit farther in time. And then to go the furthest back in time, what I found is getting the portfolio toolbox from early retirement now will take you back all the way to the 1920s, at least with respect to factor investing, simple factor investing in gold. and Treasury bonds and then goes back even further. But I wouldn't use that data before the 1920s because it's very limited and we were under a completely different kind of economy and regime. United States is more like an emerging market at that point. But anyway, the idea is that you take your two or three or however many portfolios you're comparing and run them through these tests at different time frames, recognizing that if you have a time frame that is not covering in particular the 1970s or the early 2000s, it is not going to give you a very accurate absolute figure. The absolute figure is going to give you out is going to be a higher one closer to that Michael Kitces average, because it's not in fact incorporating the worst time frame that we know about. I'm not sure I would go to the trouble of trying to compare the safe withdrawal rate or perpetual withdrawal rate from a back test to a Monte Carlo simulation simply because it's completely dependent on the nature of the data you are analyzing and how many bad years there are and how many good years there are and then how that sorts out when you run a simulation mixing them up. So there isn't going to be one rule of thumb that says that a backtest should be a 50 percentile of a Monte Carlo. In fact, it does depend specifically on when you started and ended. Because here's the thing, in the end, I'm not recommending and I do not use that absolute number as the basis for my actual withdrawals. I'm using those numbers to compare one portfolio to another, basically thinking, well, if I know this portfolio is better than the other one, in terms of a Monte Carlo or an historical safe withdrawal rate or both, I should use the better one, even if my withdrawals are going to be lower. In fact, there are two reasons you don't use that absolute number. One is that it is based on this idea that you are going to inflate your expenses and withdrawals by the CPI rate of inflation which is just a ridiculous notion that nobody does. In fact, most people in retirement have a personal inflation rate that's lower than the CPI and on average 1% lower than the CPI. And that's based on the work of David Blanchett, often referred to as the retirement spending smile. You may also add some guardrails onto your withdrawal system and then consider what part of your expenses or withdrawals are going to be mandatory and what part are going to be discretionary. Because we know if you use variable withdrawal mechanisms as opposed to the mechanism assumed in all of these simulations, your safe withdrawal rate or potential safe withdrawal rate can go up by between 0.5 and about 1.1. Then that's based on the work reflected in the Morningstar report from December 2022, where they ran a bunch of these different withdrawal strategies. For my own self, I like to divide our expenses into three categories. The first one I call keep the lights on. Some people call that a minimum, quote, dignity, unquote, floor or something else that sounds goofy to me. Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys? And that's going to include things like property taxes and food and health insurance, utilities and all of that sort of stuff. The next category I like to consider is what I call comfort expenses, which are things that make your life easier, like having somebody take care of your yard, clean your house, gym memberships, other things like that. Going out to eat wouldn't be included there. And then the third category I would put in what I would call extravagances. And these are generally your big trips or Expenses that you're not likely to experience every single year. And so the numbers I put on those things is I want my keep the lights on expenses to be 3% or less of my withdrawal. Then I'll use another 1% for comfort expenses getting us to four and another 1% for extravagances getting us up to five. And I feel that is a conservative withdrawal strategy. For somebody who actually wants to spend their money as opposed to hoarding it and dying with the most money possible. If you have withdrawal rates that are under 3%, you're almost guaranteed to die with the most money possible. That's the fact, Jack! That's the fact, Jack! And basically you have what's called a revealed preference for doing that. You may say that your goal is to spend your money, but if your behavior reflects a not spending money or not spending much money, your revealed preference, your actual in fact preference is to die with the most money. And I want to avoid that because I don't think that's a good way to live life. Forget about it.

Mostly Voices [19:22]

But in order to make that 5% withdrawal

Mostly Uncle Frank [19:26]

rate idea possible, you do need to have a good portfolio for withdrawal. And then you can incorporate some of these variable withdrawal rate strategies including not inflating your expenses every year based on CPI inflation. My own experience since retiring in 2020 is our expenses have actually gone down, particularly on the tax side because you can manage a portfolio much better than you can manage employment income. And we only have one child that's not completely financially emancipated yet. Donating to the children's fund.

Mostly Voices [20:02]

Why? What have children ever done for me?

Mostly Uncle Frank [20:09]

But anyway, hopefully that gives you some food for thought on how to use these back testers and Monte Carlo simulations as points of comparison primarily, and only accept those absolute numbers when you are covering those known worst periods. But now let's move on to your next topic. Portfolio Construction.

Mostly Mary [20:34]

Hey, I began listening to your show after spending time researching how to teach myself the math behind Ray Dalio's Holy Grail video on YouTube. I think I literally put risk parity into the podcast search. Your show teaches listeners and me how to reconstruct most of Dalio's graph by adding positions with lower correlations and seeing the outputs on Portfolio Visualizer. At least listeners can now see outputs that directionally replicate Dalio's graph. I still have a material gap in my understanding of Dalio's Holy Grail video. Can you please explain what composes Dalio's column entitled Probability of Losing Money in a Given Year? What is this? What's the algebra-math-conceptual building block here? In Portfolio Visualizer's Monte Carlo simulation, the third tab, Expected Returns, there is a section called Lost Probabilities. Is that the same thing? How do I calculate this? In his book, Risk Parity, Alex Shahidi on page 19 had a chart, A return, B risk, standard deviation, and then C, a column in which he says probability of losing money. I don't know how to calculate column C. Can you please teach me the algebra methodology? You may say, I don't think I would like another job. Looks like you've been missing a lot of work lately.

Mostly Voices [21:56]

I wouldn't say I've been missing it, Bob.

Mostly Mary [22:00]

Pretty please? Or can you direct me to a textbook to read? B. As one gets started implementing the wisdom from this show, Risk Parity Radio, into one's portfolio construction, what are some bumper guards or paint-by-number guidance parameters you could offer as guiding principles quantitative ranges? In my Excel spreadsheet, portfolio number one is my newly constructed actual portfolio, which I am going to ask some questions on in a moment if you let me. What would you say as guiding parameters? What kind of Sharpe ratio, maximum drawdown, and drawdown duration do I want to stay within? What other metrics do you look at to make sure we aren't underthinking a potential huge mistake? My snapshot tab is my current thoughts on what variables are most important. Sharpe Ratio, CAGR, SWR, and PWR, Standard Deviation, Stock Market Correlation, Drawdown, Size and Length, Monte Carlo Percentage Failure. Do you think this snapshot is instructive for comparing different portfolios, including many portfolios from this show, Risk Parity Radio? What else would you want to look at that should be included in a comparison snapshot? C. One of my concerns in my Portfolio 1 is a stock market correlation of 0.79, which seems high. However, I don't have enough experience to properly calibrate that, and it seems like the other risk parity radio sample portfolios, especially the Golden Ratio and Golden Butterfly, are in a similar correlation range. What are your thoughts? D. I straight up think it is fun and intellectually rewarding to look for positive return, low correlation investments, and there are worse hobbies. Looks like I picked the wrong weight to quit sniffing glue. However, I realize, as you have said numerous times, there are diminishing marginal returns after you get past approximately five assets. and as shown in Dalio's Holy Grail graph. To guide the practice of trying out new scenarios, can you offer a good rule of thumb of what percentage of a portfolio to dedicate to a new position in an experimental portfolio to see what it does? For example, if I invest one basis point in Bangladeshi butter, it will have zero impact.

Mostly Uncle Frank [24:48]

So what is a good experimental allocation to test out a thesis and run the results? Is there a back of the envelope allocation amount? EG, run it with 1% of assets, 5% of assets? All right, beginning with topic sub A here, where do these loss probabilities come from? Well, I hate to disappoint you that there's some magic formula for it. I honestly believe that they are just looking at historical outcomes. and that will vary depending on the time frame you're using, obviously, if you're looking at all the months or all the years, but you can easily calculate a percentage of the times that the particular asset lost money in any given sample. So I believe that's where that comes from, although I cannot speak for these gentlemen in particular. I do think they are looking at the same things because I have actually spoken with Alex Shahidi and he and his partner there, at least one of them, used to work for Bridgewater, and so it pretty much carried over that same methodology. Now when you're looking at standard deviation that is also used for calculating risk, although it's really not the same, it's kind of the best approximation that you can get using a data set, and that of course is actually based on not only whether something gained or lost in a particular year, but also the magnitude of that gain or loss. The problem you always run into with those kind of metrics is that when you're using things like standard deviation, you're making an implicit assumption that you are looking at something that is normally distributed or follows a Gaussian pattern of distribution. We know that's actually not true for financial markets. that they have what's called fat tails. And so the probabilities that you're going to calculate using a normal distribution are always going to be lower or more optimistic or more favorable, however you want to term it, which means that the actual risk is going to be greater than the standard deviation might suggest. Still, this can often be used as a point of comparison between two assets and two portfolios. All right, Subtopic B. You are looking for bumper guards or paint by number guidance parameters for looking at here. And these really do depend on what purpose you are trying to serve or accomplish with your portfolio. So if you are looking at accumulation, which you really most care about is the compounded annual growth rate, and less about the volatility because your solution for volatility is just leave the thing alone, assuming you're talking about something like the stock market that generally goes up and to the right over time, which cannot always be said for every kind of investment. You also really don't care about the safe withdrawal rate or the perpetual withdrawal rate if you're in an accumulation scenario. So now what do you care about when you are in decumulation or constructing a portfolio for decumulating? Well, what you probably most care about are those projected safe withdrawal rates and perpetual withdrawal rates because that is the most relevant marker for what you're trying to do. What's nice about those is that they implicitly incorporate things like volatility and maximum drawdowns because in fact, a safe withdrawal rate or perpetual withdrawal rate is derivative of those kinds of factors, but it's easier just to look at the output than it is to go back and be looking at the maximum drawdown or the volatility. And those calculations also implicitly take into account things like stock market correlation or correlation between two assets. And that's more of a deciding factor. And I'll give you an example. You know, you're looking at a good part of your portfolio in the stock market, and then you're trying to decide, well, what bonds do I want to match up with this for diversification purposes? and you have some corporate bonds and you have some treasury bonds, you can see by running a correlation analysis that all other things equal, the treasury bonds are going to be much less correlated to the stock market than the corporate bonds, which makes them a better choice. And oftentimes you're looking at correlations in that light. For instance, when you were looking at those individual REITs, you were probably also looking at the correlations to see Well, if I'm going to choose this REIT over that REIT, I probably want the one that's less correlated with the other things in my portfolio. In the end, you do have to actually go and run the simulations and back tests because it is really not possible to just be looking at a group of assets and guess what is going to come out as the best solution, best safe withdrawal rate. best perpetual withdrawal rate unless you actually go and do the simulations. Sharpe ratios I have found not very useful for what we're trying to do here. What would you say you do here? It's sort of, well, that's another interesting thing to compare, but trying to use that as a decision point, particularly when you're looking at multiple assets, in a grouped portfolio is really only going to tell you about that portfolio in the time period for which the data is being tested. And so it can be very noisy too. The Sortino ratio is a little bit better or more useful for this purpose and relates stronger to the safe withdrawal rate and perpetual withdrawal rate because that's incorporating drawdowns or negative performances more directly than our Sharpe ratio. But again, I don't think those are the most important metrics you need to be considering. Now, if you want some very basic parameters or rules of thumb, I can give you a few of those. And we're talking about portfolios that are good to use for retirement or drawing down on. Those kinds of portfolios will typically have between 40 and 70% in equities, and then at least half of those that equity portion will be value tilted and often small cap value tilted.

Mostly Voices [31:00]

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

Mostly Uncle Frank [31:04]

And whether they're international or domestic is much less important. You really want to focus on those Bama French factors. A good withdrawal portfolio will also have 10% or less in cash or short term debt instruments. When it gets over 10%, it tends to drag on the portfolio. So you would only want to have excess cash if you know you have excess short-term expenses, essentially. The next rule of thumb is to use treasury bonds as your bond holdings and not corporates or other things, because those are the most diversified from your stock holdings. And aside from whatever you are putting in that short-term bond allocation, the rest of them should be intermediate and long-term treasury bonds. And you're usually going to end up with somewhere between 15 and 30% of those kinds of instruments in one of these kind of portfolios. And then the last rule of thumb is to incorporate some kinds of alternative assets. When we're talking about gold, we're talking about managed futures for the most part, and those are going to take up between 10 and 25% of the portfolio. And portfolios like the one I just described, or within those kinds of parameters, typically have 30-year safe withdrawal rates using the Bengen assumptions on inflation and increasing withdrawals of around 5%, and that's using the data going back to the 1920s. So it's about 100 years of data. All right, Subtopic C. You indicated that you were concerned about a stock market correlation of 0.79 because it seemed high to you. I actually don't think it's that high because remember we are constructing portfolios here that are primarily in stocks. So you do expect them to have a reasonably high correlation with the overall stock market. I mean the whole purpose of this whole exercise of diversification is starting with something that we know performs very well over time, the stock market, but is too volatile for a good safe withdrawal. And so we're adding other things into that mix to improve the safe withdrawal rate more than we are reducing the compounded annual growth rate. Because we know that a hundred percent stock portfolio, that's either like total market or S&P 500 is going to have a safe withdrawal rate of only about 3.3 or somewhere around there. So I would not be too concerned about that. I mean, if your goal was to have something that was not correlated with the stock market, you would be looking at something like what Larry Swedroe does now with his personal portfolio, which is 50% alternative assets and only 20 some percent in stocks, all small cap value kind of issuances from all over the world. If you hold something like that, yes, you will have a much lower correlation to the overall stock market. But I would not be comfortable holding something like that because I'm not familiar enough with the kinds of things he's investing in and don't know what their long-term track record is. With somebody like that, it's in a position where he doesn't really need the money anyway, so he's pursuing his curiosity with that portfolio, I think, more than anything else. All right, Subtopic D, what is a good rule of thumb or guide to use in how much of a new investment to include in a portfolio? This is an interesting question and it has a lot to do with the volatility of the particular asset. We talked about this way back in episode 29 when we were talking about Bitcoin, and that's a good example because at least at that time, this is back in 2020, the volatility of Bitcoin was about 10 times the volatility of the stock market. And what that volatility tells you is that the more volatile an asset is, the less of it you need in a portfolio for it to make a difference. And so if something is not very volatile, you would need a whole lot more of it in your portfolio for it to show up as a significant change in the portfolio. So based on that, for instance, we determined that back in episode 29, that at least at that time, you would only want to have like one or 2% of a cryptocurrency kind of asset in a portfolio because its volatility is so high that it has the same effect that 10% in a stock market based asset would have. And if you're looking for some hard numbers for a portfolio that is primarily based in stocks, usually it is about 10% where the asset starts to make a difference or not. But if you're using something that has a particular low volatility, say like a short-term tips fund, you would need to have like 20% for that to make a big difference in the portfolio other than being a cash drag on the whole thing. So I would size the allocation based on the relative volatility of that asset compared with the stock market, assuming most of your portfolio is based on a stock market holding. And with that, we'll turn it back over to Mary for the final segment.

Mostly Mary [36:39]

What I've done with my portfolio one is, one, I bought RPAR and UPAR as a way to leverage my total portfolio to $120,000. 20%. 51 basis points seems pretty reasonable as a way to add leverage at moderate cost. The securities in my backtest are the actual holdings from the RPAR website with some adjustments. I reallocate those ProRata to 100% and then add the rest of my portfolio so everything including RPAR, UPAR, plus the rest of my holdings sum to 100%, but the entire portfolio has leverage of 120%. Then I added cherry-picked REITs and a utility ETF with stock market correlations below 0.5. I also have Berkshire, which seems to enhance the ratios. Then there is a small percentage dedicated to some alpha-chasing bets. You have a gambling problem.

Mostly Voices [37:46]

You can't handle the gambling problem.

Mostly Mary [37:50]

which I capture here as QQQ, EGI owned Tesla and some other things that may help me accumulate more or might be very wrong. But if I lost all of that group, most of my wealth is still a balanced risk parity. B. Any thoughts you have about blind spots huge risks that I am underthinking? Is the way I have done this one of the most insanely idiotic things you have ever heard? Zero points.

Mostly Voices [38:17]

At no point in your rambling, incoherent response were you even close to anything that could be considered a rational thought. Everyone in this room is now dumber for having listened to it.

Mostly Mary [38:33]

C, would you mind opining on what you think of the portfolio I constructed? I like the SWR/PWR, the low failure Monte Carlo, the Sharpe ratio, I worry that the correlation may be too high. How do you think about it? D. How should I think about how close I am to done? I am 50 and I have two pre-college kids. How do you think about my 9.35% safe withdrawal rate and how risky it is? I want to make sure I understand the conceptual framework. I don't think that word means what you think it means. Inconceivable. If I withdrew 9% annually, my safe withdrawal rate from my current liquid net worth, just my portfolio, excluding utility assets, that amount slightly exceeds the annual spend of my current lifestyle, which is not minimalist nor spendthrift. My PWR would cover about 60% of my burn. I have zero debt except on my five rental properties, which generate about 8% cash on cash, not part of my liquid net worth. I have a bunch of non-liquid utility assets that I use and which don't have debt, like my non-mortgage home, my cars, and other things that most people own. This ashtray, this paddle game, and the remote, and these matches, and this lamp.

Mostly Voices [40:02]

Well, that's all I need, too. I don't need one other thing. I need this. The battle game and the chair and the remote control and the match it for sure. Whoa, what are you looking at? What do you think I have some kind of a jerk or something? And this, that's all I need. Are listeners allowed to make silly references too, or is that just you? Now, I only have two things. My friends and my thermos.

Mostly Mary [40:57]

Based on your guidance from episode 105, I think of my rentals as a means to lower my monthly burn separate from my risk parity portfolio. How do you advise listeners to triangulate on what they need viS-A-Vis their costs here? If I can really withdraw nine percent, I am very financially free. My pocket's well protected at last. Bob Dylan.

Mostly Voices [41:19]

Try imagining a place where it's always safe and warm. Come in, she said, I'll give you shelter from the storm.

Mostly Mary [41:35]

what I think I would do is keep fully invested for 10 years with the aspiration that I could get a 10-year seven percent CAGR and double my net worth over that time. I would like to keep working, but just feel less stressed about it all. If I could retire at any time, I plan to set my kids up to be self-sufficient adults. and spend my money on awesome times together while I'm still alive. I don't care about their children. I just care about their parents' money. Hopefully, well into the future, whatever is left when I die will go to charity. E. What is the airspeed velocity of an unladen swallow? You don't frighten us English pigs. How do you have a hilarious show in part about something called the Holy Grail and make so few Monty Python references?

Mostly Voices [42:26]

I fart in your general direction. Okay, now I'll stop singing, Kevin. Feeling seven up, I'm feeling seven up. Feeling seven up, I'm feeling seven up. It's a crisp, refreshing feeling, crystal clear and light. America's drinking seven up, and it sure feels right. Feeling lucky, Seventh. Kevin, stop singing, man.

Mostly Uncle Frank [42:59]

Seventh? Huh? Who's the singing guy? All right, I did take a look at the Excel spreadsheet you also sent me with lots of tabs in it and the portfolio you constructed. It does, as you mentioned, look a lot like the portfolios used to construct RPAR and UPAR, which are kind of classically constructed risk parity style portfolios. And then I see you've added a few other things. So overall, I think it looks fine as a classically constructed risk parity style portfolio. I'm not sure it's exactly what you want for your purpose though, which is to have a portfolio with a higher safe withdrawal rate and perpetual withdrawal rate. Now the last time we really talked about this was in episode 280 where we were Discussing a 2013 article that Michael Kitces had written about risk parity style of investing. And you'll recall, or maybe you don't recall, but I'll tell you again, that the original idea of those kind of constructions for hedge funds like Bridgewater was to take a very conservative portfolio that was bond heavy, intentionally bond heavy. and then add leverage to that to create something that would have close to the same kind of risk characteristics as the overall stock market, but hopefully would be less volatile and/or have a higher return over time. So that really was not designed necessarily to be a withdrawal portfolio or a decumulation portfolio. and it was not focused in particular on higher safe withdrawal rates or perpetual withdrawal rates. And so what we've tried to do here is modify that concept to get us to portfolios with higher perpetual and safe withdrawal rates, which in fact generally means increasing the stock holdings in those kind of portfolios to that kind of sweet spot between 40 and 70% in equities. But this is also why we keep that reference portfolio, the All Seasons, as one of our sample portfolios, because that is essentially a classically constructed risk parity style portfolio without the leverage applied to it. And you can see from the way it behaves, it's probably not something that you would want to hold in retirement. Now those portfolios that are PAR and UPAR have constructed are more along the lines of a portfolio like that with leverage added to it. And I think we last talked about those constructions in particular in episode 260, if you want to go back and listen to that. But we've talked about it from time to time, going all the way back to an early episode that is on the podcast page, although I can't recall what it is right now. But anyway, besides being overly bond heavy, those portfolios also contain tips, which I don't think are actually that useful for these kinds of portfolio constructions, because they don't really seem to perform any job very well. You had only one job. They're not as good as nominal bonds in terms of being a diversifier against stocks. you're better off with the ordinary treasury bonds. And then if you're looking for something to fight inflation, they really don't do that very well either because of their bonds. So you're better off holding something like managed futures or commodities or even some value tilted stocks to cover that. And I did cite to an interesting article that came out a few months ago from Bill Bernstein who was constructing his own TIPS bond ladder. because he's concerned about his portfolio when he gets to be age 104. He's another one of those pessimistic don't spend money kind of people. But anyway, in doing that process and in talking to a few people and he writes in the article that he realized that tips do not really have a good place in any ordinary kind of portfolio precisely because they don't seem to perform any of these jobs well.

Mostly Voices [47:13]

You had only one job.

Mostly Uncle Frank [47:17]

and their real function would be to be operating in some kind of bond ladder. And hopefully more people will come to that realization. It was interesting when, I guess it was a year ago, Justin from Risk Parity Chronicles and I got on a Zoom call with Alex Shahidi and talked about these various things. And I said to him, Look, these tips really are not helping these kind of portfolios. And while he disagreed with me, he couldn't really refute what I had to say. So I probably would not use them. They'd just take up space, essentially, that can be used better for something else. Either if you want more bonds, use the nominal bonds. If you want something else to actually fight inflation, then go put that in there instead of the TIPS. Managed futures would be probably my first choice there. Because those actually did quite well in years like 2022, unlike the TIPS, which did very poorly in years like 2022. You had only one job. All right, now getting to your subpoint D, you're talking about a 9.35% safe withdrawal rate. I would not rely on that absolute number. And the reason is this, it's for the same reason that I talked about before. your data set that you're looking at looks like it's only from 2004 or 2005 up to the present. And so it does not cover the 1970s in particular, and it does not cover the complete period of the early 2000s, basically the end of 1999 through about 2010 or 11. Now there isn't kind of an artful way of making a kind of a comparison like that. because I know you can't really test that portfolio given the specific assets that are in it all the way back to the 1970s. You can try in one way by just looking for similar asset classes. Another way of doing this is to take a portfolio like the Golden Butterfly or Golden Ratio, run it for the same time period that you are running this portfolio and see what safe withdrawal rate comes out of that analysis and it will be higher. It will be 7% or something like that. I haven't done it myself. So say it comes out to 8%. Then compare that with what you know is the long term safe withdrawal rate for that, which is more around 6% or something like that, and reduce what you believe your current portfolio is by that kind of percentage. so you'd give it a haircut of 23 or 75% of what you think it is based on the limited data set that you have. So my gut feeling is you are getting close, but you're not quite there yet in terms of how much you need because I would not be taking those kinds of withdrawals out of any portfolio, at least not year after year after year. However, you do indicate that you have a number of other assets and sources of income. And so the way you want to look at all of that is first take your annual expenses, then subtract off whatever income you're getting from these rental properties and other sources to give you that figure of what actually needs to be covered by the portfolio. I would not include any of your utility assets in this calculation. I don't need any of this. I don't need this stuff.

Mostly Voices [50:48]

I don't need you. I don't need anything. Except this. This is the only thing I need is this. I don't need this or this. This is the ass-tray. It's this paddle game.

Mostly Uncle Frank [51:07]

Because the house you live in is actually an expense. It's got property taxes and maintenance and anything else you own, unless you're going to sell it, cannot be used for your retirement or expenses going forward. The best thing about having a house without a mortgage though is that it does reduce that shelter expense considerably and it also reduces your personal inflation rate. You also probably want to evaluate whether you are getting enough income out of your rentals, for example, and whether you'd be better off selling one or more of them and just investing that money But that all depends on their cap rate and other things you rental people deal with. We only have one rental property and I do not want another one.

Mostly Voices [51:54]

I don't think I'd like another job.

Mostly Uncle Frank [51:58]

I do share your desire to spend as much as reasonably possible while we are alive and to the extent we want to give it to our kids, do it early and not later. Let's do it. Let's do it. Because nobody really needs to be getting an inheritance when they're 60 years old. But that is in fact the average age these days in the United States when people do receive inheritances. Which to me is indicative of the poor planning that has been going on in financial services. Because only one thing counts in this life.

Mostly Voices [52:35]

Get them to sign on the line which is dotted.

Mostly Uncle Frank [52:39]

Ben Carlson wrote a good article about this recently. I'll link to it in the show notes, basically, stating that people that have saved money are usually oversaved, but it's really not that great a percentage of the people because about half the people in the US have not saved anything for retirement, and another 25 to 30% haven't saved anything significant. But I'll leave you that to peruse at your leisure. And finally, as to Monty Python, Yes, I have used a number of those clips, although not recently.

Mostly Voices [53:11]

Go and tell your master that we have been charged by God with a sacred quest.

Mostly Uncle Frank [53:19]

But it's always on my mind.

Mostly Voices [53:23]

I cut down trees, I wear a hill suspenders and a bra. I wish I'd been a girly, just like my dear Papa. I cut down trees, I wear a hill suspenders and a bra. And a jar. I wish I'd been a girl, just like my dear Papa. Oh, babies, and I thought you were so bunched.

Mostly Uncle Frank [53:48]

And with that, I think you've spent enough time in the easy chair, about an hour, according to the recording, although it'll be less than that once I take out all the pauses.

Mostly Voices [53:58]

Give those guys the chair. The chair. The chair. The chair.

Mostly Uncle Frank [54:06]

But thank you very much for your contributions to the Father McKenna Center and thank you for your email.

Mostly Voices [54:14]

And now for something completely different.

Mostly Uncle Frank [54:18]

And the something completely different is our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page. This podcast has gone on kind of long so I'm going to move through this expeditiously this week. But just looking at the markets, the S&P 500 was down 1.29% for the week, the Nasdaq was down 1.93% for the week. Small cap value represented by the fund VIoV was down 4.32% for the week, but it went up a whole lot last week, so I think it's just more the last quote of the day on last Friday, the Friday before Labor Day that really skewed how that came out. No matter. Gold was down, gold was down 1.20% for the week. Long-term Treasuries represented by the fund VGIT were down 0.47% for the week. REITs were also down. Our representative fund R E E T was down 0.39% for the week. Commodities were actually up. The representative fund PBDC was up 0. 67% for the week. Preferred shares were down, representative fund PFF was down 0.68% for the week, and managed futures were the big winner last week. Our representative fund DBMF was up 0.83% for the week, displaying its nice diversification properties once again. Moving through these portfolios, the sample portfolios, and I'm not going to go through what's in them this week, but you can check that out on the website. the first one the All Seasons this representative or reference risk parity style portfolio the classic version was down 0.56% for the week it's up 4.8% year to date and down 3.64% since inception in July 2020 moving to these three kind of bread and butter portfolios first one's a golden butterfly this one was down 1.45% for the week it's up 4.73% year-to-date and up 12.29% since inception in July 2020. Next one's a golden ratio. This one was down a little less than the last one, down 1.27% for the week. It's up 6.02% year-to-date and up 8.69% since inception in July 2020. We move to the Risk Parity Ultimate. This one was down 1.5% for the week. It's up 6.53% year to date and up 0.68% since inception in July 2020. This is the Kitchen Sink Portfolio. Now moving to our three experimental portfolios which involve leveraged funds. We run hideous experiments here so you don't have to. First one is this Accelerated Permanent Portfolio. It was down 1.95% for the week. It's up 6.29% year to date and down 18.98% since inception in July 2020. Next one is the aggressive 5050, our most levered and least diversified portfolio. This is down 2. 04% for the week. It's up 6.76% year to date, down 26.04% since inception in July 2020. And the last one, the Levered Gold Ratio was down 2.09% for the week. It's up 4.09% year to date and down 20.31% since inception in July 2021. It's a year younger than the other ones and started at a most inauspicious time. But that concludes our portfolio reviews for the week. More info on the website. Looking like a typical yucky September. September has got the reputation for being the worst month of the year for financial assets. Only the managed futures seem to like it. But now I see our signal is beginning to fade. Just one announcement. We are headed for our main annual fundraiser for the Father McKenna Center, which is called the Walk for McKenna. which is a actual walk or virtual walk if you prefer that we were doing on September 30th this year. If you are in the DC area you are invited to come join. I will put that link into the show notes and get a t-shirt out of it. I do have a bunch of t-shirts that we will be getting as a group for the patrons on Patreon who donated throughout the year. So if you're interested in one of those, send me an email and let me know. But I'll be talking about this throughout the month of September. In the meantime, if you have comments or questions you'd like to send to 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, follow, give me some stars, a review. That would be great. Mmmkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio, signing off.

Mostly Voices [1:00:05]

drugging I've been going home who who baby?

Mostly Mary [1:00:41]

I've been long back home sit down and patch my bones and get back to the home the risk parody 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.