Mostly Voices [0:00]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer.

Mostly Mary [0:19]

And now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor. Broadcasting to you now from the comfort of his easy chair, here is your host, Frank Vasquez.

Mostly Uncle Frank [0:38]

Thank you, Mary, and welcome to Risk Parity Radio. If you are new here and wonder what we are talking about, you may wish to go back and listen to some of the foundational episodes for this program. Yeah, baby, yeah! And the basic foundational episodes are episodes 1, 3, 5, 7, and 9. Some of our listeners, including Karen and Chris, have identified additional episodes that you may consider foundational. And those are episodes 12, 14, 16, 19, 21, 56, 82, and 184. And you probably should check those out too because we have the finest podcast audience available.

Mostly Voices [1:28]

Top drawer, really top drawer.

Mostly Uncle Frank [1:30]

Along with a host named after a hot dog.

Mostly Voices [1:34]

Lighten up, Francis.

Mostly Uncle Frank [1:37]

But now onward, episode 289. Today on Risk Parity Radio, we're just going to do what we seem to do best here. Everyone in this room is now dumber for having listened to it. Which is hack away at the pile of emails you've left me. Which are always quite interesting. And so without further ado, here I go once again with the email. And... First off. First off, an email from Matt. My dad said he listened to Matt Damon and lost all his money.

Mostly Mary [2:12]

Yes, everyone did. But they were brave in doing so.

Mostly Uncle Frank [2:16]

And Matt writes... Good morning, Frank.

Mostly Mary [2:19]

Thanks so much for taking the time to answer my email on your podcast. I appreciate it so much and all you do. I apologize the attachment didn't come through. Attached is what Ledo has sent me thus far, including their proposed allocation, a Monte Carlo of my current portfolio and their proposed portfolio, as well as a stress test showing how the both portfolios would have performed during the 2008 banking crisis. I will definitely take your advice and push harder when I meet with them again. Since listening yesterday, I have been running simulations on Portfolio Visualizer and based on what I can come up with, it appears that the Golden Butterfly is likely going to be my best bet for a long-term portfolio. I was able to get a 93.58% success rate with a 4% fixed withdrawal for 55 years, rebalancing and withdrawing annually, and a 4.26% safe withdrawal rate and a 4.04% perpetual withdrawal rate. My only issue is going to be the tax consequences due to a large percentage of my assets being in a taxable brokerage account. I ran another Monte Carlo that would require far less selling in my taxable accounts, and it returned a 90.63% success rate, same parameters, with a 4.06% safe withdrawal rate and a 3.97% perpetual withdrawal rate. screenshot below of that Monte Carlo, as well as the breakdown of taxable assets versus tax advantaged assets in my portfolio, in case it is helpful. If I don't go with Ledo, if you have any final suggestions on how best to allocate, that would be amazing. I believe I am getting closer, but your input would be greatly appreciated. Thank you again, Matt. Fortune favors the brave.

Mostly Uncle Frank [4:09]

Alright, for reference purposes, this is a follow-up to episode $286, which was about the Lido Shuffle. Or Matt's experience in consulting with a financial provider, Lido, and our suggestions as to how to look at what they do in an organized and effective manner. So I looked at all these attachments you sent me this time and a couple of them were from Ledo. I do want to call your attention to at least the ones that were sent to me in Word format. Make sure that you read the fine print at the bottom of those projections because they say they are hypothetical and do not include commissions. So obviously not including all the fees, you need to take a haircut from whatever they're projecting there. But the more worrisome word is hypothetical because generally that means is they are taking a system they constructed today and saying, well, if we would have invested this way 10, 20 years ago or whatever period they're using, then we would have had these results. which is fine for just a plain old back test, but the more specific they are getting, the more curve-fitted this is or data mined it is, and the less reliable it's going to be. Forget about it. So whenever I see hypothetical in something like this, I feel like, well, that's not good enough. What I really need to see now is what are the asset classes you're using broadly for this? and then let's do some Monte Carlo simulations and some other simulations so we're not taking one specific back test of one specific portfolio of very specific assets and thinking that that is going to be a meaningful analysis to rely upon. Some of the rest of what they prepared for you and you sent to me in the PDF form looks like kind of the stock and trade of what you get from a financial advisor. Often they will do these Well, what would it look like in this crisis or what would it look like in that crisis? Which can be interesting, but a lot of it is kind of make work because you might as well just look at the whole simulation because you're not going to see exactly the same kinds of crises ever in your lifetime probably. So actually knowing the big picture and that history doesn't repeat, but it rhymes is probably enough or more than enough Although you can look at the illustrations if you'd like. It does make for lots of pretty pictures and grabs. That's the fact, Jack!

Mostly Voices [7:00]

That's the fact, Jack!

Mostly Uncle Frank [7:04]

And then I went ahead and looked at what you were running through Portfolio Visualizer, and I will put these links in the show notes. The first portfolio that you were running looked like it was about 60% stocks, half of it in value, and most of it kind of straight US, but about 15% I think in international and specifically in REITs. Then there was about 28% long-term treasuries, 8% gold and 3% cash. The difficulty you have with that, in particular with portfolio visualizers, you're only getting data back to the mid-1990s. And that's because the data they have for international and REITs in particular only goes back to '95 or '94. which is why you probably also want to run those things over at Portfolio Charts to have a look at them. Because you are going to get some anomalous results if you use REITs in Portfolio Visualizer and compare it to something else. REITs are always going to look a bit worse than their total data would suggest because if the data only goes back to the 1990s, it does include that catastrophic year of 2008 for REITs. So it's going to make the portfolio look a little worse than it probably is. I agree that a golden butterfly kind of portfolio does look pretty good for you for the long term. You'll also note that when you run that in there, you do get data back to the 1970s. So it's a more complete set. So you may end up wanting to be a little bit more aggressive on your equity side. somewhere between the 40% that you see in the golden butterfly and the 60% that you were originally modeling. And so one way to look at that is if you take a golden ratio style portfolio, but instead of using REITs, fold that back into the large cap and the small cap value. So you'll have 26% of those. And I'll put a link in the show notes. You can look at this. This will give you Another back test that goes back just as far as the Golden Butterfly because the REITs only go back to 94. But if you take them out, you can go back to 1978 or 76, I believe. But anyway, you'll see that adding a little bit more on the equity side probably does improve the long-term performance overall because remember, the REITs are just another form of equity. and they do tend to model something like mid-cap value or mid-cap blend. So I might play around with those kinds of percentages, particularly with the asset classes that you have much more data for. And then although you don't really have the data to analyze it, I would consider whether you would want managed futures in there, either as a partial substitute for some of the gold or some of the long-term treasury bonds. or some of the cash, depending on how much cash or short-term bonds you have. Because I do think that some allocation to that is going to be kind of the wave of the future, as if it's the new gold now that we have lower cost funds to make it viable. The trouble is, at this point in time, I just can't say exactly what that is. I will give you a nice little paper from AQR, Analyzing Managed Futures and Trend Following. back to the 1880s. This is however an asset class I believe that can be added later, since we don't have as much data as I'd like to see about it now, at least about the funds that are available. Things may be a bit more clear in about 2030. Hopefully that all helps and thank you for that email.

Mostly Voices [10:52]

Lido missed boat that day he left the shack, but that was all he missed. Keep coming back.

Mostly Uncle Frank [11:05]

Second off. Second off, we have an email from My Contact Info.

Mostly Voices [11:13]

Oh, I didn't know you were doing one. Oh, sure. I think I've improved on your methods a bit, too. And My Contact Info writes.

Mostly Uncle Frank [11:21]

Hi, Frank and Mary. I follow both Roth and Fau.

Mostly Mary [11:25]

Would very much look forward to your views on this debate and your thoughts on what this debate suggests about the financial industry as a whole. Milkshakes come to mind. Thank you.

Mostly Voices [11:37]

If you have a milkshake, and I have a milkshake, and I have a straw, there it is. That's a straw, you see. Watching?

Mostly Uncle Frank [11:48]

Well, that actually is a very interesting article, not only because of the content, because it reveals a lot about the predilections and biases of the authors of the material, both of them. Just to get everybody up to speed, this is an article by Alan Roth criticizing a study done by Wade Pfau where he was doing some kind of analysis using fixed income annuities as an asset class essentially and trying to show that they would be better than bonds in in the analysis he was doing. And I first heard of this on the podcast, the Retirement and IRA Show, episode EDU 2334. Hopefully I can find that and link to in the show notes. And although I don't agree with all of their methodologies, I do like the approach those guys take, which is trying to spend more money in retirement and not less money in retirement. Yes! But anyway, they had reviewed this article and then also evidently there is a comment section to this article where Wade Pfau and Alan Roth go back and forth about various things. Unfortunately, I don't have access to the comments. I think you need to be a subscriber to Advisor Perspectives to get them. If anybody knows where you can find them, I'd be interested to see them though. So anyway, getting to the article itself, and I had read Wade Pfau's article before that about the fixed income or the fixed indexed annuities. My problem with that was that fixed indexed annuities are not defined as an asset class, they are a contract and there is no such thing as an index of fixed indexed annuities. So, you have to assume the parameters of such a thing and I didn't feel like he had any real legitimate basis for what he was assuming. Alan Roth did pick up on that and said, I'm not sure you're going to be able to find a contract like this. At least that exists in the other world that you're assuming. Because fixed index annuities are always going to be based on the world they exist in. And so he's also assuming a world for stocks and bonds with particular parameters. And it didn't look like to me he was assuming a similar world for this fixed index annuity. The next problem Alan points out, which I was unaware of but makes sense to me, is that this study that Wade found was actually paid for by insurance companies who sell annuities.

Mostly Voices [14:26]

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

Mostly Uncle Frank [14:31]

Which in retrospect doesn't surprise me because my experience in dealing with McLean Asset Management and this RISA profile and the kind of work they do over there does seem to tilt towards getting people into annuities really. I was one of the guinea pigs for their original Risa profile thing and then I recently, a few months ago, went through their online five-day seminar where they go through a lot of that thing and try to get you to join their club.

Mostly Voices [15:02]

Please accept my resignation. I don't want to belong to any club that will accept me as a member.

Mostly Uncle Frank [15:09]

But one of the things they like to use is this funded ratio analysis, which is kind of a black box and is difficult to understand until you ask a few questions. And when you ask a few questions, what you learn from the way they're looking at this is that they are essentially assuming a very low rate of return for invested assets that is similar to a TIPS bond ladder or something like that. And that's one thing you always want to look for is if there is a bias towards pessimism or assuming that the future of invested assets or portfolios is going to be worse than the past. What that essentially means is that you're better off buying a contract, an annuity, because that will be more attractive essentially. You're throwing off the risk to the insurance company because for whatever reason, your crystal ball says the future is going to be worse than the insurance company actually believes and they're willing to pay you more money that's better than your pessimistic outlook. Now you can also use the ball to connect to the spirit world. And I think some of that is actually what's going on in that study that Wade did that Alan Roth was criticizing. The other problem I had with that that Alan Roth did not really mention is what I call the wizzy-otti problem. or actually Danny Kahneman calls it the Wiziyati problem. Wiziyati is an acronym and it stands for what you see is all there is. And so if you limit your study to a few defined assets and don't look at all of the assets available, you are essentially committing this Wiziyati problem. By limiting the universe of things that you can invest in, you can make certain things look better than they would if you were considering everything.

Mostly Voices [17:07]

Surely you can't be serious. I am serious. And don't call me Shirley.

Mostly Uncle Frank [17:14]

Kahneman describes this as going to a restaurant and seeing a menu and saying, All right, this is all they have and I can't get any variations on that. In fact, if you just ask them, it was a decent restaurant, They could probably prepare you all kinds of different things that even are not on their menu. And so that we need to make sure that we're not limiting ourselves to particular menus. Thanks for the big menu down here. Thanks a lot. And this is a common issue I see with lots of analyses, calculators, other things where the only data they're offering you is something like, all right, you can have the S&P 500, an intermediate treasury bond fund, and then whatever other asset we're interested in, in this case being a annuity. I find those things fundamentally useless because you're not considering all of the different kinds of index funds you could have, all the different kinds of bonds you could have, all the different kinds of alternatives you could have, and comparing them all together, which would be a legitimate comparison because I want to be looking at what are all of the things I can reasonably invest in and then what combination of those things is the best, not looking at some limited menu and only picking from that. Forget about it. And you can use that filter to throw out lots and lots of studies or analyses or discussions you see. So when I first saw the file analysis, I said, well, where is the factor investing? Where are the alternative assets? Where are the different kinds of bonds? they're not in here, then what real use is this study that you are limiting it to these assumed stocks, assumed bonds, and assumed fixed annuity? It's not very useful when you think about it. Now, Alan Roth didn't specifically focus on that, but I think that that is a fundamental criticism and why I didn't find the Fau paper to be that interesting to begin with. That being said, you should also recognize that Roth has his own blind spots and predilections. And one of those is to essentially find reasons to criticize things he doesn't agree with. He's got his own wizzy-oddy problem where he basically only wants to assume that the world is a cap-weighted US market fund, a cap-weighted international fund, and some bonds, and then some TIPS ladders and other things. and so he often makes straw man kind of critiques of things. One of the more interesting articles that he wrote was right after Morningstar came out with its last projections and safe withdrawal rate analyses and other analyses of variable spending. He wrote an article about that in January of this past year. I'll link to it in the show notes. But he was really kind of ticked off by Morningstar's article because Morningstar had made projections that were more on the average range of things. And Roth is an eternal pessimist and always looks for reasons not to spend money. It'll cost you a guinea. And so if you see that, if you read that article, you'll see some illegitimate criticisms, one being that the Morningstar projections are too high. Well, too high for what? They were very consistent with historical outcomes. And then he says things like, well, you didn't account for advisor fees. I drink your milkshake. Well, duh, you usually do not account for advisor fees when you're doing an analysis like that because you don't know what they are. It does tell you that maybe you shouldn't be going to these advisors when you can construct a decent portfolio without them, or at least paying them an AUM fee of some kind. A buy straw. Reaches across the room and starts to drink your milkshake. And then he raised the shibboleth that I often hear advisors raise, which is, well, the psychology of the average amateur investor says that they'll do bad things. Well, the answer to that is to become more informed about how to do your investing and not do bad things like jumping in and out of funds or portfolios and selling low and buying high and all those sorts of things. That wasn't really a legitimate criticism of the Morningstar paper. And then he really jumped to shark when he starts talking about what Mark Halbert said in some article Mark Halbert wrote. I'm afraid Mark Halbert is kind of like the Kramer of finance writers. If he writes something, chances are it's probably going to be wrong or inaccurate or the wrong thing to do in the next period. I've seen that repeatedly throughout the last 20 years of his writings, which is basically true for just about any pundit that's trying to predict the future or use some spurious indicator to say something is going to happen.

Mostly Voices [22:16]

I award you no points and may God have mercy on your soul.

Mostly Uncle Frank [22:20]

But he couldn't stop there in that article. The next thing he had to throw in was, what about Japan? Anytime somebody raises, well, what about Japan? It had this bad period for decades. Therefore, it's possible or likely that this is going to happen here now, tomorrow. Human sacrifice, dogs and cats living together, mass hysteria. That is an example of a cognitive bias called the possibility effect, which is related to one called ignoring base rates. Because if you're gonna think like that, You also have to ask the question about what about not Japan? What about all of the other markets? And you don't pick the worst one you can think of and say that that is the most likely outcome in the future.

Mostly Voices [23:06]

Because that is how people end up catastrophizing about all kinds of things. Fire and brimstone coming down from the skies. Rivers and seas boiling. 40 years of darkness, earthquakes, volcanoes, the dead rising from the grave. And that is not an analysis.

Mostly Uncle Frank [23:20]

For an analysis, you need to start with base rates, which is taking all of the data, using that as your denominator, and then putting Japan or whatever on top. And that gives you a base rate of the probability of having a Japanese scenario. So you would take all of the countries that had stock markets that you could invest in from that same period that you're saying Japan, what about Japan? look at all of their performances and use those as your denominator, put Japan on top, and what is the probability? What is the base rate of that occurring is what you get from that calculation. That's the starting point that you should start at. Not I can think of something bad, therefore it's got a high probability of occurring. That's a base. And he concludes that article, what we're really worried about here is running out of money in retirement. We're really worried about running out of money in retirement. That is actually not the problem most people are having in retirement, at least the ones that have saved. I'm specifically talking about people who have saved enough money to hire a fancy financial advisor. What we know from that in a recent article from Ben Carlson is that people aren't just not spending their money. they're oversaved. They're leaving money on the table. They're leaving life on the table. And the reason that's happening is probably because you have these overly pessimistic advisors and writers who themselves are either not going to retire or are not spending much of their money and are going to die with the most money possible. And so we end up with a situation where most of the country are people that haven't saved enough for any kind of retirement or strategy, but the ones that have are frequently not using it to their best advantage. And there needs to be a balance there that you will not get to from Alan Roth's writing.

Mostly Voices [25:22]

You can't handle the dogs and cats living together.

Mostly Uncle Frank [25:26]

What you'll generally get from him is, I'm smart and you should be afraid.

Mostly Voices [25:30]

Never go in against a Sicilian when death is on the line.

Mostly Uncle Frank [25:41]

I'm here to tell you he's not that smart and you don't need to be afraid. As with all expert reports, commentators, critiques, you need to apply the Bruce Lee process to all of this stuff. And the Bruce Lee process is to take what is useful, discard what is useless, and add something that is uniquely your own. Don't forget to do that. And be both wary of annuity sales people.

Mostly Voices [26:25]

Because only one thing counts in this life. Get them to sign on the line which is dotted.

Mostly Uncle Frank [26:32]

and AUM modeled financial advisors.

Mostly Voices [26:37]

I drink your milkshake. I drink it up.

Mostly Uncle Frank [26:47]

Very interesting stuff. And thank you again for your email. Next off, we have an email from Alexi.

Mostly Voices [27:04]

So that's what you call me, you know? That or his Dudeness or Duder or, you know, Bruce Dickinson, if you're not into the whole brevity thing. And the dude writes...

Mostly Mary [27:16]

Hey Frank, just dropping you a note so you know I am still out here enjoying all of your episodes. Not many questions for me recently because I haven't really been inspired by any new products or ideas lately.

Mostly Voices [27:26]

You can't handle the gambling problem.

Mostly Mary [27:30]

Still loving your consistently excellent opinions on all things investing.

Mostly Voices [27:34]

You need somebody watching your back at all times.

Mostly Mary [27:38]

Enjoy your travels, AZ.

Mostly Uncle Frank [27:41]

Well, thanks for stopping in, dude. I'm sure you'll be catching up with my contact info sometime soon and things to talk about.

Mostly Voices [27:49]

Yeah, well, the dude abides.

Mostly Uncle Frank [27:53]

But that's what we do in this little dive bar. Bring stuff in and start talking about it.

Mostly Voices [28:00]

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

Mostly Uncle Frank [28:05]

And I do thank you for your previous efforts. You'll note if you've been listening recently, I have been referring back to some of the episodes about momentum and other things where you have given us things to think about. And so thank you for your email. Take it easy, dude. Oh, yeah.

Mostly Voices [28:23]

I know that you will. The dude abide.

Mostly Uncle Frank [28:36]

Last off, an email from Sharon. And Sharon writes, hi, Frank.

Mostly Mary [28:43]

I am somewhat new to investments, and I have what might be seen as a stupid question about bonds. If you buy an individual bond, you have a yield to maturity and you know you're going to get your full principal back plus its interest coupons. But if you buy a bond ETF like TLT, there's not a defined maturity, is there? So it's quite possible that I won't get my full principal back when investing via bond ETFs. This is something I never really understood and that's why I always buy individual treasury bonds and not ETFs. But I'd love to use ETFs for its simplicity. Can you explain that in detail for a newbie like me to understand? Thanks, Sharon.

Mostly Uncle Frank [29:26]

Sure, I'm happy to explain this. And actually, I'm going to cheat because there is a very excellent little article written by Ben Carlson last November about this very topic. And the truth is, just putting something in a fund does not change its character. So whether you own stocks by themselves or stocks in an ETF or bonds by themselves or bonds in an ETF does not actually change the character or performance of those instruments. What does change is how they are managed because obviously within a fund there will be shifts over time. The fund is buying and selling things. Whereas if you are just holding a stock or just holding one bond, there's no activity going on with that thing. And I'll talk more about that, but let me just read some of this from Ben Carlson, because I think it explains it better than I probably could. He writes, the reason many people like holding individual bonds like this is because they know exactly what they are going to get and when. Even if rates move up or down in the meantime, you can wait out those fluctuations and still receive par value at maturity. After experiencing big losses in their bond funds this year, many investors are wondering if they would have been better off holding individual fixed income securities. That sounds like a good idea at first glance, but it does not hold up in reality. Getting your money back at maturity might be a wonderful emotional hedge, but it's not like you're going to be any better or worse off. When rates go up, the value of all bonds goes down, whether you are holding an individual bond or a bond fund. While holding to maturity does allow you to get your principal back at par in an environment of higher rates and inflation, you will still be getting back nominal dollars that are worth less at the time of maturity. For example, let's say you own a bond fund that yields 2% and rates go up to 4%. If the duration of those bonds is five years, you would expect that fund to fall something like 10% in value, not fund. For the sake of this example, let's say you then decided to sell your bond fund but then buy all the individual bonds in that fund, which now collectively yield 4% and hold them to maturity. Are you better off now or not? No, you're in the exact same place either way. Now let's say you just own one 2% five-year bond and rates go to 4%. Sure, you do get your money back at par if you hold until maturity, but now you're earning 2% less per year than the current market rate of 4%. So you could sell that 2% bond at a loss and move up to the one that is now paying 4% interest, but you're going to lose either the principal value if you sell or the income if you hold the bond that pays the lower rate. That's just how bond pricing works. There are no free lunches here. And what he's saying is just a specific example of what I just told you, which is that the character or performance of an investment does not change whether you're holding it inside a fund or outside a fund. The real difference that you see day to day is that the funds are priced at market value. When you look at your individual bond, Unless you actually go and find out what the price of that bond is that day, it does not look like it changed in value. In fact, if you market to market, it will have changed in value. So if the bond fund goes down in value, your bond is actually worth less than it was before. So if you are holding particular bonds and interest rates rise, the value of your bonds has actually fallen. And if you were to sit down and accurately evaluate what the value of those bonds is in your portfolio. It will have fallen and it will have fallen the same amount as you would see in a fund that holds the same bonds. It's just more visceral and obvious to see it in a fund because those are traded at market rates every day while your bonds are not and you'd have to go look that up. and calculate it to see what it's actually worth. So what this ultimately means is that the correct way to hold them has to do with how you are managing them and what you are actually doing with them and not trying to think or believe that holding them in one form is better than the other in terms of the actual investment. So what has Ben Carlson list as some of the pluses and minuses of holding individual bonds. He says they could lead to higher trading fees, usually paid in the form of bid-ask spreads. They typically require more money depending on what you're trading. They make it harder to diversify your portfolio. They make it harder to rebalance your portfolio. They add an additional level of complexity to the equation If you don't know what you're doing, and that gets to this valuing that I'm talking about, could lead to a constantly changing risk profile in terms of maturity and duration as your bonds get closer to maturity, although some investors utilize a bond ladder to make this more constant. What he's saying there is if you buy a bond today, say a five-year bond, in two years it's going to be a three-year bond. And maybe if you wanted to hold be holding five-year bonds, you would have to sell that bond and buy another five-year bond. So if you're holding individual bonds to maturity, your makeup of your bond allocation is actually changing over time unless you do something to put it back to where you want it or put it back to where it was originally. You can do that with a bond ladder. Other characteristics of individual bond holdings, They can offer investors some peace of mind about interest rate changes, even though it's more about emotions than math. They can make it easier to match assets with liabilities. On the other side of the ledger, if you're buying bond funds, this gives you professional management and economies of scale in terms of trading costs because they hold a whole basket of bonds and you don't have to buy them each by themselves. They come with an annual expense ratio. Which in most cases is going to be lower than the transaction fees of trying to acquire all the individual bonds by themselves. They offer lower minimums to invest. They make it easier to diversify and rebalance. They give you the ability to set constant maturity and duration profile. Since most bond funds have target maturity levels. What that means is, you know, if you're buying an intermediate bond fund, they're going to be selling and buying bonds in that to maintain the ladder that they're talking about. So if it's a seven to 10-year ladder, they're always going to be selling the seven years before they become six years and buying new 10 years. And you don't have to do that yourself. What else about bond funds? It doesn't guarantee all bonds will be held to maturity since there is turnover involved. And it can make it more difficult to match assets with liabilities. So what is the bottom line here in terms of portfolio management? It really comes down to this, if what you were constructing is in fact a classic bond ladder that you're going to keep separate and apart from your portfolio, maybe it's a TIPS ladder, then you could buy these individual bonds, but you have to have a management schedule or technique where you are either using that money as it comes off the bond ladder or you are reinvesting that at the top of the bond ladder. to maintain the same characteristics of the bond ladder itself. If you are trying to do that in conjunction with managing a portfolio of stocks and other things, that can become a real nightmare because you not only have to balance out your allocations between your individual bonds in terms of those versus the stocks and other assets you're holding, You also have to make adjustments in your bond holdings to make sure that they are the same kinds of bond holdings as they were before. And so as they mature, they get younger and younger, your bond holdings go from an intermediate bond holding to a short-term bond holding, which requires you to manage out of that, sell your bonds at some point, and buy the intermediate ones to to maintain the same allocation that you started with. Now you don't have that issue when you're using a bond fund. You're just buying or selling the bond fund and the managers of the bond fund are taking care of all of these individual management issues to make sure that it is in fact the same kind of thing you're holding from year to year and isn't changing from a long term to an intermediate term to a short term bond holding. But that gets you to the other useful thing about holding individual bonds is this target maturity idea, that if you know you're going to have a particular expense at a particular time, say in five years, then you can invest in the five year bond knowing exactly what you're going to be getting at the end of that five years. And that's how insurance companies, for example, manage their liabilities. They know that they're going to have a certain amount of claims each year, so they have to have a certain amount of cash available. And so they spread out effectively a bond ladder along those lines. If you don't have specific expenses, you are actually matching though, this just creates an inconvenience and a management problem because you would rather just manage the whole portfolio as one thing and be taking money out of the whole portfolio in accordance with your portfolio management rules and not fiddling around with these individual bonds to try and balance all of that out. All right, you did ask another specific question. If you buy a bond ETF like TLT, there's not a defined maturity, is there? Actually, there is. There is a more defined maturity or duration with the fund than there would be with the individual bonds. You can look inside that fund and see exactly which bonds it is holding. They are designed to keep that average maturity to one year or one range of years. So you know that whenever you buy that fund it's the same thing. If you buy the individual bond, you know what the maturity is today, but that maturity keeps getting shorter and shorter over time, which may not be desirable unless you're going to buy all of the maturities of all the bonds that you want and then average that out. and effectively creating your own bond fund. In any event, if you are holding a bond fund, you should be thinking about holding it as an investment for at least as long as its average duration is. That's why you would term intermediate bond funds and long-term bond funds as long-term holdings, because you would want to be holding them pretty much just as long as you would have held an individual bond or a similar length of time because if you're actually going to compare them, what if I held this bond 10 years from the time I bought it until the time it matured? And then what if I held this fund for 10 years that had similar bonds in it? That's not an exact comparison because the maturity of the individual bond is getting shorter and shorter, but it is a rule of thumb to tell you if you are buying a bond fund of a specific duration, How long should you be expecting to hold it? And with intermediate and long-term bond funds, the idea is you are holding them essentially forever, or as long as you're holding the rest of the portfolio. And the only thing you're doing is buying or selling it in a rebalancing management move that is also related to the other assets in your portfolio. The bottom line is if you're going to hold individual bonds as part of a larger portfolio, you need to have fairly sophisticated management rules to make all that work. Otherwise you should be holding bond funds. And if you're going to be using bond ladders, I would use them separate and apart from the rest of your portfolio for a specific purpose. Hopefully this helps. If you want an analogy for this, this is kind of like that optical illusion of the dress that sometimes looked white and gold and sometimes looked Black and blue, depending on who was looking at it and what the lighting was. But in reality, it was still the same dress. That is the ultimate reality of buying a bond separately or within a bond fund. It's the same investment with a different appearance and management that makes it look or feel different when it's really not. Final post script on that. You can actually buy ETFs these days that are just one bond. And so you buy a fund like U10, U-T-E-N, or U2, U-T-W-O, and that will get you the one 10-year bond or two-year bond that is the most recent issuance. And then when a new one is issued, they sell the now old one and buy the new one. It's mostly for people that trade such things, but it is just an example of all the different things you can do with ETFs. these days, those are very new funds. I'm not sure that they will catch on, but we'll see if they do. In any event, hopefully that helps and thank you for your email. But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frank@riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com Put your message into the contact form and I'll get it that way. Just one announcement before we go. This is our main fundraising a month for our sponsor charity, the Father McKenna Center. It is the Walk for McKenna and I will link to that in the show notes if you are interested. And if you're in the DC area, you can walk with me and Mary. Yeah, baby, yeah! Sorry, I had another announcement. We may not have a podcast this week. Because we may have to go on hiatus again. But we'll see. It's not that I'm lazy.

Mostly Voices [44:30]

It's that I just don't care.

Mostly Uncle Frank [44:34]

In any event, 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. M'kay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio.

Mostly Voices [44:53]

Signing off. He's for the money, he's for the show, lead all the way for the dollar, little. One more job out again, one last. the Risk Parity Radio show is hosted by Frank Vasquez.

Mostly Mary [45:33]

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