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 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 [1:26]

Top drawer, really top drawer.

Mostly Uncle Frank [1:30]

Along with a host named after a hot dog. Lighten up, Francis. But now onward, episode 295. Today on Risk Parity Radio, we're just gonna get back to what we do best here, which is answer your emails. And so without further ado, here I go once again with the email. And... First off. First off, we have an email from Luke. You got your mind right, Luke. And Luke writes...

Mostly Mary [2:08]

Frank, thanks so much for the thought and time you put into your podcast. It's an acquired taste, but I've learned a lot from your ramblings.

Mostly Voices [2:16]

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

Mostly Mary [2:20]

I found you through the FIRE community as I was waking from the Matrix to realize that VTSAX and chill was not a sufficient investment plan for the next six decades. Not gonna do it.

Mostly Voices [2:32]

Wouldn't be prudent at this juncture.

Mostly Mary [2:36]

I thought about trying to see you at economy, but it sounds like your celebrity status prevented the dive bar conversation I was hoping for.

Mostly Voices [2:44]

You might remember me from such self-help videos as smoke yourself thin and get confident, stupid.

Mostly Mary [2:51]

As a Harry Brown fan and a sucker for the data presentation at Portfolio Charts, I used the Golden Butterfly as a starting point for my target allocation. However, monkeying around with Tyler's Portfolio Matrix, I'm able to score more ones than him with 25% total stock market, 30% small cap value, 20% long-term treasuries, 20% gold, and 5% cash. the only category it is significantly worse in is the standard deviation. Maybe Tyler would have forgone the symmetrical beauty of golden of the golden butterfly if he was less risk averse. I think I can take more volatility than he wants, since I expect an inflation adjusted federal pension. But I have to worry about the security of my pay every October. What a weird juxtaposition. Am I guilty of putting too much effort into fitting my allocation to Tyler's calculator and am I am missing other considerations. Regarding my expected pension, you've helped me realize that I embrace frugality as a solution to safe withdrawal rate success. I'm tempted to maintain keep the lights on expenses under the level of the pension and use portfolio withdrawals mostly for comfort and extravagances. Would your 3% 1% 1% advice change if you had significant passive income relative to your safe withdrawal rates?

Mostly Voices [4:18]

Speaking of kids.

Mostly Mary [4:26]

Why? What have children ever done for me? Do you think your espousal of a high withdrawal rate is enabled by the safety nets of your children or community's ability to care for you should you exhaust your resources? Emerson's definition of success presupposes community.

Mostly Voices [4:50]

But if you didn't have kids and hadn't invested in long-term relationships or community affiliation, do you think you would be comfortable drawing down as much early on? I don't care about the children. I just care about their parents' money. One final question.

Mostly Mary [4:57]

My only 401 option close to small cap value is the TSP S fund tracking the Dow Jones U.S. Completion Total Stock Market Index. Do you think this small cap factor is worth tilting towards without value? I could have used a little more cowbell. I haven't read much on this yet, and my only concern with the allocation listed above is it feels a little uncomfortable to have more cap value than total stock market given the S Fund underperformance since inceptions, which is twice as long as I've been investing. Maybe a moot point if I'll be rolling it into the IRA anyway in five years. Thanks, Luke. Cue the Star Wars sound bites. Huh?

Mostly Voices [5:39]

What do you mean they blew up the Death Star? Oh, f***. Who's they? What the hell is an aluminum falcon? P.S.

Mostly Mary [5:54]

Have you thought about mimicking Mr. Money Mustache's carpentourism by bartering in-person financial entertainment and anecdotes for travel perks? If you're looking to visit the Tahoe, Yosemite, or Bay Area, I would be happy to help enable the trip in exchange for dinner at my place or a day on the ski slopes together.

Mostly Uncle Frank [6:17]

It's a trap! Well, first I must note that Luke goes to the front of the line for making a very generous contribution to the Father McKenna Center. Use the force, Luke.

Mostly Voices [6:32]

Let go, Luke.

Mostly Uncle Frank [6:35]

And Luke, it was so generous that the one to fundraising employee that we have down there sent me an email. She likes to keep track of the Risk Parity Radio money.

Mostly Voices [6:46]

Yeah, baby, yeah! So thank you very much for that.

Mostly Uncle Frank [6:51]

And if any of you other listeners want to go to the front of the email line, you can do that by donating either through our support page and Patreon or directly to the Father McKenna Center. And if you do that, please Note that in your email so that I can move to the front of the line. Yes. Now getting to your questions. First to your variation of the Golden Butterfly portfolio, which itself is a variation of Harry Brown's permanent portfolio, as you observed. I think we need to be mindful that the Golden Butterfly is a very conservative style of portfolio, and it's conservative in primarily two ways. It's only got a 40% exposure to the stock market. and then it's got 20% of its assets in a short-term bond fund, which is essentially cash. So really only 80% of it is directly exposed to what you would call risk assets. The short-term bond fund is essentially a risk off kind of asset. And so the main difference in your version of it is that you have 50% allocated to the stock market and then only 5% allocated to short term bonds or T bills. And so over time that is likely to outperform the Golden Butterfly just because of those exposures. It's just taking more risk. And you can also see from your calculations that its outperformance is not at the expense of making it excessively volatile. So it is more volatile than the Golden Butterfly portfolio, but it's getting more bang for the buck than it is in terms of getting more volatility. But going back to Bill Bengen, it has been observed that the optimal amount of stocks in a drawdown portfolio for the purpose of maximizing safe withdrawal rate, which is taking into account this risk reward nature, is somewhere around 50 to 60%. So if you have less than that, like in the Golden Butterfly, you're going to have a more conservative portfolio that'll be more pleasant to hold in times like these, that's for sure. But over the long run, you're probably better off holding something that has somewhere around 50% to 60% in stocks in it, depending on what else you've got in the portfolio. Bill Bengen thinks it's around 55%. But I think we do need to appreciate that is over a very long term. If you were just talking about, say, a one, five, or even 10-year period, the more conservative portfolio may actually outperform the more aggressive portfolio. And I just realized you do have 55% in stocks in this portfolio. Having trouble adding up two figures today, 25 plus 30 does equal 55.

Mostly Voices [9:46]

That's the fact, Jack! That's the fact, Jack!

Mostly Uncle Frank [9:50]

So in fact, what you've constructed looks very similar to the Golden Ratio Portfolio, or at least a version like we have in the sample portfolios where we devoted 10% of it to REITs, which are also in the stock market world. And this does kind of bring us full circle back around to what we call the macro allocation principle, that portfolios with similar macro allocations are likely to perform similarly over time. And really the biggest difference is going to be in things like standard deviation and volatility. And so if the primary driver in your portfolio is your allocation to stocks, It's basically going to be driven mostly by whatever that allocation is. And then everything else around it, while it should add to the returns overall, is mostly there as a volatility dampener. At least that's what you would hope. You may also wish to run that one in the toolbox that you can download from early retirement now that's in a spreadsheet form, but I think, yeah, you're going to find that that portfolio has about a 5% safe withdrawal rate on a 30-year period for the last 100 years or something very close to that. All right, moving to your next question about your pension. And you say your pension is likely to cover your baseline expenses. Now, you also referenced my 3%, 1%, 1% advice and just so everybody knows what we're talking about. When I talked about this before in terms of a withdrawal strategy, I like to think about 3% as being your keep the lights on expenses, 1% being devoted to comfort expenses, as in eating out, going to the gym, having somebody mow your lawn, clean your house, those sorts of things. Stuff you could do without if you wanted to, and then another 1% on extravagances. Just your fun travel, your Teslas and other things you really don't need but you want to have because they're fun. Woohoo! Please give me a million dollars and the fridge with a padlock and hey, hell yeah, huge pectoral muscles. Now that advice was based on the idea that you did not have any other income. Now, the reason I think that's basically a conservative withdrawal strategy is because I think if you construct a decent portfolio, you should be having a portfolio that has at least a 5% safe withdrawal rate over a 30-year period, and you're only taking between 3% and 5%, and then you are not taking inflation adjustments every year, at least not CPI related adjustments. So if your actual inflation adjustments were average for a retiree, their CPI minus 1%, that effectively adds another half a percent in potential safe withdrawal rate there. And so where you end up with this is that you're really only spending about 4% most years and then spending some extra in some years when you're doing extravagant things.

Mostly Voices [13:03]

First to get the sugar, Then you'll get the power. Then you'll get the women.

Mostly Uncle Frank [13:15]

Because if you can vary those withdrawals, you do also get a bump on your safe withdrawal rate depending on the particular strategy you are employing. So anyway, yes, if you have a pension, that makes everything just even more easier. You don't need to see his identification.

Mostly Voices [13:30]

We don't need to see his identification. These aren't the droids you're looking for. These aren't the droids we're looking for. You can go about his business.

Mostly Uncle Frank [13:41]

You can go about your business. Move along. Move along. Move along. Now the simplest way of looking at that is just subtracting the pension from your overall annual expenses. And then you may have some minuscule withdrawal rate, in which case you just take whatever you need. If your pension was covering the 3%, you could easily withdraw another 3% on your portfolio with just about any portfolio and do that forever and you won't run out of money. When you're in that kind of situation, what you get to is that your portfolio selection can be done much more on the basis of personal preference and comfort as opposed to looking for the portfolio with the highest safe withdrawal rate. In fact, you could use something as simple as a bond ladder, an extended bond ladder, or a simple annuity when you get older, and that would cover these tiny expenses that you're planning on spending. I would actually think about spending more money and using a risk parity style portfolio, but I realize people have different preferences. Well, laddie, frickin' da! So using the bond ladder or the annuity would not maximize your withdrawals, but it would make sure that they were covered and you wouldn't have to think about anything. On the other hand, if you wanted to leave a large inheritance in this kind of circumstance, you would keep most of your portfolio allocated to all stocks or mostly stocks. That's what somebody like J.L. Collins does. Even in retirement, his portfolio is 80/20. because he plans on leaving a significant inheritance and he has a very low withdrawal rate. So you can see your exact formulation does depend on a number of personal factors that include age, whether you have a pension or some other source of income, what your base expenses are, are they ridiculously low like Warren Buffett as a percentage of your wealth or are they somewhere in the I need to manage this category, which is four or five percentage-ish. In general, the lower your withdrawal rate, the more it makes sense to use the most conservative options. The annuity option, I'm talking a simple annuity, not some complex variable garbage, or something indexed on Frankenstein's index that was just made up by the company to Make sure they get paid. Because only one thing counts in this life.

Mostly Voices [16:19]

Get them to sign on the line which is dotted.

Mostly Uncle Frank [16:22]

Or you can go with a bond ladder. Where people go really wrong with this is instead of using those two options, they want to hold big piles of cash. Wrong! And that does not make any sense. Wrong? Wrong!

Mostly Voices [16:36]

Right?

Mostly Uncle Frank [16:40]

Wrong! Because if the reason you are holding big piles of cash is you are afraid and you don't want to spend money, you're going to be better off with the annuity or the bond ladder because that solves your problem. Basically, if you're that fearful and you're not taking out much money anyway, you have really no business in getting involved in investing because you can't stomach it.

Mostly Voices [16:59]

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

Mostly Uncle Frank [17:03]

So just take the contractual payments you would get out of the bond ladder or the annuity and be done with it. You can't handle the- Bananas! But then once you are willing to take that risk and want to spend more of your portfolio, then you are looking at what kind of portfolio construction is allowing you to spend the most money.

Mostly Voices [17:20]

The best, Jerry, the best.

Mostly Uncle Frank [17:24]

Which is what we're talking about here. That's what I'm talking about. If you don't want to spend the most money, then you don't need one of these portfolios. Forget about it. All right, moving along to your next question, which is more philosophical.

Mostly Voices [17:38]

If I didn't have kids and hadn't invested in long-term relationships or community affiliation, Elmyra Gulch, just because you own half the county doesn't mean you have the power to run the rest of us. For 23 years, I've been dying to tell you what I thought of you. And now, well, being a Christian woman, I can't say it. Do you think I'd be comfortable drawing down as much early on.

Mostly Uncle Frank [18:03]

Well, I suppose if I didn't have those personal relationships, I'd be just more completely career focused and be working on something like that. That dog's a menace to the community. I'm taking him to the sheriff and make sure he's destroyed. In which case, I wouldn't need to be thinking about retirement. But pretty much nobody can just do nothing forever without either developing Some interests, relationships or positive things going on in their life or some kind of addiction. It could be even TV and beer. Mmm, beer. I have spent a lot of time thinking about and researching what to do with oneself, but I think the better question is what should be the process for deciding what to do with oneself? And there are lots of guidelines out there about this. if you read Dan Pink's Drive and some other books and materials, you find that what motivates people are the concepts of autonomy, mastery, and purpose. So if you're involved in activities that involve those components, they're probably going to be pretty satisfying. If you read something like Doc G's book, he divides purpose into purpose identity and connection or relationships. I think those are all just different aspects of purpose and that honestly relationships and identity are probably the most important ones for most people because that big P purpose has to do with having an impact on the greater world which is not something you necessarily have that much control over. Whereas you do have lots of control over your identity. I am a fisherman. I am a bicyclist. And relationships, which you can develop or not develop. Another good way to approach this is to invert the question and look at what are called the five regrets of dying. What are you trying to avoid? Regret avoidance is a very powerful way of approaching this question as a process. I won't go on and on about that now, but I'll link to it in the show notes. And then there's the question of how do achieving flow states inform all of this? And for that you're going to have to go back and read some Mihaly Csikszentmihalyi about flow and the books by Steven Kotler, who is really kind of the master writer about all things flow. flow, which can be achieved by anything through sports, writing, meditation, singing in a choir, seeing a sunrise, but can also be a worthy goal or idea to pursue. But in answer to your question, if I did not have relationships or community affiliations, i.e. the relationship and identity purpose components, Then I probably would be focused more on career choices and making money.

Mostly Voices [21:08]

Give me back my slippers. I am the only one that knows how to use them. They're of no use to you. Give them back to me. Give them back. And so all of this drawing down would probably not matter that much.

Mostly Uncle Frank [21:23]

But that's also why it's good advice to say that you should retire to something and not away from something. Because you do want to have something to do. All right, last question. Small versus small cap value. Guess what?

Mostly Voices [21:52]

I got a fever.

Mostly Uncle Frank [21:55]

Yeah, there isn't a whole lot of value in plain old small cap blend. It's not bad or wrong, but it will not have the same properties as small cap value because if you look at all of these quadrants, small cap growth is actually the one thing you probably don't want in a portfolio unless you are speculating or think you have an eye on companies because those are the most volatile companies. A few of them will succeed. seed wildly, most of them will go nowhere. So if you look at a lot of Paul Merriman's research, for example, they find that just by excluding small cap growth from your mix, you do improve the overall performance of your overall portfolio that you really want. Large cap growth and then the rest of it in types of value. And the only prescription is more cowbell. So I think it'll make some difference in terms of diversification, but not a whole lot overall versus say just holding an S&P 500 fund. And you are correct that it probably is a moot point if you're rolling it to an IRA in five years or less anyway. Because in that period of time, whether small value outperforms or underperforms small growth is going to be pretty much a coin flip. And as for your last comment, yeah, it would be fun to go see you in Northern California sometime. I'm not sure when though. I know Mary and I do want to go to Yosemite at some point because I've never been there.

Mostly Voices [23:28]

No, no, no, you're doing it all wrong.

Mostly Uncle Frank [23:32]

I have been to Tahoe and I have been to San Francisco. So that is kind of on our list of places to hang out in and explore for some period of time. 'Cause that's how we like to travel.

Mostly Voices [23:44]

And that's the way, -huh -huh, I like it.

Mostly Uncle Frank [23:48]

And perhaps then we can work more on relationships and identity. Anyway, thanks again for your donation and thank you for your email. Second off. Second off, we have an email from Ethan who writes us from Singapore.

Mostly Voices [24:21]

And Ethan writes, I,

Mostly Mary [24:24]

Frank, like many of your audience, I'm not a U.S. citizen, nor do I live in the U.S. There's a well-known Bogleheads investment strategy to investing S&P 500 ETFs and the one like domiciled in Ireland via interactive brokers to avoid being taxed at the 30% rate on your dividends. What do you think of this strategy and is there any downside that you can see other than perhaps lower liquidity and higher spreads, which wouldn't matter much to a forever holder? What happens if a US person invests only in Ireland domiciled ETFs? Would it have any benefits at all? Thanks from Singapore, Ethan.

Mostly Voices [25:07]

The captain is a one-armed dwarf. He's throwing dice along the wharf. In the land of the blind, the one-eyed man is king. So take this ring.

Mostly Uncle Frank [25:25]

Well, I once had an arbitration in Singapore that was about the construction of the airport in Manila in the Philippines. I remember at the time my brother-in-law's brother, you can imagine who that person is, was living there and showed me around.

Mostly Voices [25:45]

Wipe him down with gasoline till his arms are hard and mean. A very interesting place. Through the alley back from hell when you hear that steeple bell you must say goodbye to me.

Mostly Uncle Frank [26:00]

but that's not why you wrote in. I'm afraid I do not have too much to add beyond the article that you cited to and I will link to in the show notes. This circumstance does not appear to apply to very many people. It doesn't apply to regular US citizens or US residents and it doesn't apply to nationals from countries with favorable tax treaties with the United States. International taxes and how they work is a topic that I try to understand but always rely on a professional to advise me. It's just too complicated and the rules frankly don't make a whole lot of sense. Very ad hoc and Byzantine. Inconceivable. As to your question, what happens if a US person invests only in Ireland domiciled ETFs, would it have any benefits at all? Well, according to the article, no, it would not. And it probably doesn't apply if you are a US person. You also should recall that if you are being taxed on dividends, if they're qualified dividends, they're only going to be taxed at a 0%, 15%, or 20% rate anyway, not 30%. And if they are non-qualified dividends, they're going to be taxed as ordinary income. So if you are a US person, I don't think this applies to you. At least that's my story and I'm sticking with it.

Mostly Voices [27:26]

I'll drive that tanker.

Mostly Uncle Frank [27:29]

But do not consider any of this real tax advice because I am not that knowledgeable in this area. Forget about it. And pretty much only know what applies to us. But interesting question from afar. And thank you for your email. Gave me a nice opportunity to indulge in a little Tom Waits there. From now on board this iron boats, you're home.

Mostly Voices [27:59]

So heave away, boys. Last off. Last off is an email from Gary. Gary. Oh, Gary.

Mostly Uncle Frank [28:18]

And Gary writes, hi, Frank.

Mostly Mary [28:21]

Could you please explain how the new QQQY zero DTE options ETF works? And if you think it could be interesting as a diversifier in income for a retired person like me?

Mostly Voices [28:36]

You're insane, Gold Member.

Mostly Uncle Frank [28:40]

Well, I looked at this fund Gary, and what can I say?

Mostly Voices [28:44]

You have a gambling problem. Let's just talk about what it is first.

Mostly Uncle Frank [28:48]

So this is a brand new fund that came out last month, an ETF ticker symbol QQQY. And what it does is this, it invests most of its money in just treasury bonds, but then every day sells put options on the NASDAQ. or the QQQs. And over the past year or so, these zero date options that expire the same day have become all the rage. And so it's trying to take advantage of that. I can't see any reason to use something like this in a retirement portfolio or anybody's long-term portfolio. It's not a long-term asset. It's a short-term speculation. Well, you have a gambling problem. And you could implement a strategy like this yourself. You could go and sell put options, these zero DTE options that expire every day. You could go into the market and just do this every day or every day you think it would pay off. You're going to be getting the premium if the thing expires. But if the NASDAQ falls a lot that day, you could have to pay a lot of money. Surely you can't be serious. I am serious. And don't call me Shirley. So it's a complete speculation. Targets just ahead. Targets should be clear if you're going low enough. You will have to decide. You will have to decide. You will have to decide. But this is also a really good example of a fad ETF, which is something that has become very common in the past few years with the expansion of a lot of ETF products. And so what will happen here is a provider of ETFs will be looking at the news to see what is popular.

Mostly Voices [30:42]

They're sitting out there waiting to give you their money or you're going to take it.

Mostly Uncle Frank [30:46]

And whether that's cannabis or artificial intelligence or zero DTE options or any number of other things. They will then use that popularity to go construct an ETF and put it out there as a product for amateur investors to use. And usually these things have some kind of life cycle. They usually don't stick around for more than a year or so. Because once the fad is over, nobody's interested in the thing anymore. This one might have more staying power because it's not based on a particular sector or kind of investment, like the short Kramer fund. Look away, I'm an idiot.

Mostly Voices [31:31]

That was out, I'm not sure it's still around, but there was a

Mostly Uncle Frank [31:34]

fund, an ETF, that basically looked at whatever Kramer was investing in, and CNBC and going short those things. But anyway, I would doubt that the people running this fund have any real acumen for Trading NASDAQ options and are really just trying to collect the 1% fee that they're going to be getting out of investments in this ETF. Am I right or am I right or am I right? Right, right, right. And even if it did make money, it would be grossly tax inefficient because basically it's generating a taxable event every month, really every day, but then they pay it out every month. And so the other thing you're going to see is the fund is likely to decay over time and then will be pulled off the market at some point. I think it's down 15% in nominal value just in the past month. So no, I don't think this is something I would touch with a 10-foot pole, especially if you're looking for assets to invest in in retirement.

Mostly Voices [32:36]

You can't handle the gambling problem.

Mostly Uncle Frank [32:40]

In general, you want to stay away from ETFs that are investing in fads and you want to stay away from ETFs that are involved in lots and lots of transactions. And anything that trades a lot of options on a daily basis is going to fall into that category. This is kind of a Forrest Gump investment.

Mostly Voices [32:59]

You never know what you're going to get on a

Mostly Uncle Frank [33:03]

couple of different levels. Are you stupid or something? Honestly, as stupid as a stupid does. But I will be curious to see how many of these things come out these days and how long they'll last. 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.riskparriyrader.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, a review. That would be great. M'kay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Mary [34:11]

We sailed tonight for Singapore, we're all as mad as hatters here, I've fallen for a tannoy more, took off to the land of not, drank with all the Chinamen, walked the sewers of Paris, I drank along a coloured wind, I dangled from a rope of sand, you must say goodbye to me. [Speech] 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.