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 [0:39]

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.

Mostly Voices [0:50]

Yeah, baby, yeah!

Mostly Uncle Frank [0:54]

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 the finest podcast audience available.

Mostly Mary [1:26]

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 297 today on Risk Parity Radio, we'll just do what we do best here, just answer your emails.

Mostly Voices [1:49]

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

Mostly Uncle Frank [1:53]

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

Mostly Voices [2:01]

Oh, I didn't know you were doing one. Oh, sure.

Mostly Uncle Frank [2:05]

And My Contact Info writes... Food for thought.

Mostly Mary [2:08]

Comparing Maxify Planner with New Retirement. Is conventional planning meeting a reasonable fiduciary standard? Larry Kotlikoff. Hello, Jerry.

Mostly Voices [2:19]

Hello, Noman.

Mostly Uncle Frank [2:24]

Well, I did not make Mary read the rest of this email, which was forwarded, what appears to be an ad from the economist Larry Kotlikoff.

Mostly Voices [2:34]

Oh, I know the chunky that left these chunkies. Noman.

Mostly Uncle Frank [2:42]

And he is plugging his latest version of A planner that he's put out called Max Maxify Planner or something like that. Hello, Jerry, may I come in? And comparing that with New Retirements Planner.

Mostly Voices [2:57]

Hi, Newman.

Mostly Uncle Frank [3:01]

And it was kind of amusing reading it because it was filled with straw men and things you probably don't want anyway presented as good things to have. Hello, Jerry.

Mostly Voices [3:12]

What a pleasant surprise. Hello, Noman.

Mostly Uncle Frank [3:15]

The thing you should always remember about planners is that they are essentially glorified spreadsheets or spreadsheets with a nice interface put on the front of them. So they're just calculators, that's all. And the general problem I have with them is that they present themselves as giving you more certainty about these calculations than you would have if you just did them yourself or on a spreadsheet. The truth is that some of the calculations you can do about the future are pretty certain. You can go find what your Social Security is going to pay. You know what your current expenses are and you can make a decent estimate of those if you're not going to change your lifestyle. And you can do other estimates like that and come out with reasonable numbers. But there are certain things that cannot really be estimated very well except in a range of outcomes. One of those happens to be portfolio performance over time, which is usually done with the Monte Carlo simulation and comes out with a range for that. But if you try to combine things that are not very predictable with things that are very predictable, Oftentimes what you get is a mess and what you get is something that looks like it's telling you more certainty than it really is telling you or giving you more comfort than you should be taking from it. In my mind, you should be separating out what are the more predictable items out of your calculations and do those separately from the less predictable ones. because you're gonna get a much better picture of where you are with something like that than trying to pretend that by putting more data into something and calculating it out to the third decimal that that is actually more useful. It may be more precise, but it's probably precisely wrong. Right? Wrong! Now let me just stop on a few highlights from this ad copy that you sent me. One of them was the assertion that most financial planners just take 80% of current income and use that as the projection for your expenses. Now, that is true if you use some garden variety planner that might be attached to your 401k or something like that. That is not true of any reasonable planner that I'm aware of these days. And it's a stupid idea. You should calculate your expenses as expenses. not as something that is based on your current income.

Mostly Voices [5:57]

Are you stupid or something? Honestly, as stupid as a stupid does.

Mostly Uncle Frank [6:02]

The reason the financial services industry commonly used 80% of current income is because it's a lot of work to make somebody actually add up their actual expenses. But if you don't actually do that work, yes, you're going to have garbage in, garbage out with any of these calculators. Forget about it. The second thing Kotlikoff likes to tout frequently in this ad and others is his use of consumption smoothing in these projections. Now, consumption smoothing is an assumption that economists use in academic studies and papers about what a rational actor might want in the future. Unfortunately, that is not how the real world works. Oh no.

Mostly Voices [6:53]

You will find that it is you who are mistaken about a great many things.

Mostly Uncle Frank [7:04]

In fact, our futures are so uncertain in many ways that the idea that we could stand around at age 30 or 40 or even 50 or 60 and know what all of our preferences are going to be and what our life is going to be like in 10 or 20 years is not realistic.

Mostly Voices [7:23]

Forget about it.

Mostly Uncle Frank [7:27]

Especially when it comes to things like will you get divorced or will your spouse die or will somebody have a medical issue or any other things that could happen in life are certainly not going to be accounted for by any form of consumption smoothing. This is why Nassim Taleb makes fun of economists so much because they pretend that by having more data or making these kind of assumptions, their predictions of the future are going to become more accurate. In fact, that's false. That's not how life works. It's not Newtonian physics.

Mostly Voices [8:06]

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

Mostly Uncle Frank [8:14]

It's a complex adaptive system, which means your ability to predict the future is limited.

Mostly Voices [8:18]

You can't handle the crystal ball.

Mostly Uncle Frank [8:22]

And really the best you can do is to come up with ranges. Now the other thing this touts, and which doesn't make any sense either, is the idea that you're going to put in conservative assumptions into something and then get a useful answer out of that. If you go into a calculator, put conservative assumptions into it, or aggressive assumptions, and then compound those over time, what you are going to get is something that is far outside the range of possibilities. Something that has probably never occurred and probably never will occur. Surely you can't be serious. I am serious. And don't call me Shirley. What you want to be doing with your inputs for anything with an uncertain outcome is putting in the most realistic assumptions you can come up with and then looking at a range of projections and using that as your conservative and aggressive boundaries. And he throws in another 80% straw man argument into this. No man! That saying that the industry views an 80% success rate on a Monte Carlo simulation as successful enough. I'm not sure that's true for most financial advisors. It could be true for some of them, but in any event, what that would tell you is that you either need a different portfolio or a different withdrawal strategy. But it's not telling you a success and failure rate because the success and failure is the probability you'd have to change your plans because you're going to run this thing every year, and not the idea that you're just going to blindly follow something until it runs out of money. That's a silly assumption that's often made in these kind of sales pitches. Forget about it!

Mostly Voices [10:12]

Anyway, I have nothing against people trying calculators and

Mostly Uncle Frank [10:16]

using calculators. I myself bought Kotlikoff's version of his calculator back in 2006 or 2007, I think it was called ESP or something at that point in time. But one thing I learned by trying to use something like that is that it's not really that useful in predicting the future. And you're probably better off if you understand where these calculations come from, which ones are likely to be certain and which ones are likely to be uncertain, to just be doing it yourself with spreadsheets. Any Monte Carlo simulator that is actually analyzing the portfolio that you propose to hold Another problem with these calculators is they have limited data sets in terms of that kind of analysis, which makes them pretty much next to useless for long-term planning. Not going to do it.

Mostly Voices [11:07]

Wouldn't be prudent at this juncture.

Mostly Uncle Frank [11:11]

But I'm sure in the end, this calculator works just as well as many of the others that are out there. And if these things help you visualize and project things in a way that's attractive to you, then go ahead and use them. Just do not count on them as a security blanket just because you use one of these calculators does not make the future more or less uncertain than it would be had you not used the calculator.

Mostly Voices [11:36]

Crystal Ball can help you. It can guide you.

Mostly Uncle Frank [11:40]

And a simpler calculator or even pen and paper is likely to give you just as useful a projection as a more complicated thing with pretty graphs and lots of inputs.

Mostly Voices [11:57]

What we do is if we need that extra push over the cliff, you know what we do? Put it up to 11. Exactly. One louder. Why don't you just make 10 louder and make 10 be the top number and make that a little louder? These go to 11.

Mostly Uncle Frank [12:12]

In fact, beware if there's too many inputs because the more variables you input into a future forecasting machine, The more likely it is to be precisely wrong. Oh, come on, Jerry, you're wrong, people. They want to watch freaks. This is a cat-astrophe. Kramer. Hello, Newman. Anyway, enough ranting about economists using economist assumptions to do financial planning.

Mostly Voices [12:39]

Well, if only you'd known, you could have saved some time and given it directly to me. Newman. And thank you for your email. Second off.

Mostly Uncle Frank [12:50]

Second off, we have an email from Kyle.

Mostly Mary [12:59]

Kyle! And Kyle writes, Dear Frank, thank you for the amazing podcast and for your work at the Father McKenna Center. I am sure that these two services bring a great deal of value into the lives of many people across the spectrum of financial situations. After making a small experimental contribution the last time that I wrote to you, I was pleased to find that this could be a recurring and automatic way to donate and have elected to do so.

Mostly Voices [13:23]

Yeah, baby, yeah!

Mostly Mary [13:26]

As someone who was able to turn their life around a number of years ago and become a contributing member of society with the help of organizations like the Father McKenna Center, I hope that more of your listeners may hear this and consider doing the same. Let's do it. Let's do it! I say this for two reasons. The first is genuine appreciation. The second is to make my intent to jump to the front of the line sound like altruism. I'm playing that card. Yes! The question, For simplicity, let's assume a portfolio of two assets, A and B. Total portfolio value starts at $100,000, split 50% between each asset. Let's also assume $1,000 per month in contributions to this portfolio, disregarding all other factors such as taxable events, if applicable, distributions, fees, etc. Would the outcome change if rebalancing was done by A, using the monthly $1,000 contribution to keep the 5050 balance as closely as possible throughout the year by simply buying whichever asset had fallen below 50% B. Splitting the monthly $1,000 contribution in half between the two assets and then rebalancing the portfolio all at once, once per year. How about when this is repeated over and over throughout the life of a portfolio? It seems like approach A is more of a proportional accumulation of two assets in parallel to each other, where B is selling one asset high and buying an inversely correlated low of another. But would the outcome change? To put it another way, would shaving some off the top of the peaks to fill in the troughs have a different outcome by simply filling in the troughs without any peak shaving? That was weird, wild stuff. It is possible that I had the math skills to approach this at one time. But that time long, long since passed if indeed it ever existed to begin with. I think you have mentioned an engineering background, so throwing it over to you seemed like a better idea. Finally, Bob Ross is noted for his distinctive manner of speaking, which many people find pleasing, regardless of whether they like painting or not. Your own manner of speaking is very much like this. Your pronunciation, grammar, and cadence are quite pleasing. My wife agrees.

Mostly Voices [16:03]

The best Jerry, the best.

Mostly Mary [16:06]

She is not interested in the nuts and bolts of finance, but is quite happy when I put on your podcast occasionally when we are in the car together. Sir, you are the Bob Ross of finance. Best regards, homeless Kyle.

Mostly Voices [16:21]

I want to hold you every morning and love you every night, Kyle. I promise you nothing but love and happiness.

Mostly Uncle Frank [16:28]

Well, thank you, Kyle, for your interest and enthusiasm for the Father McKenna Center, and thank you for your donation. That's why you're going to the front of the line. No more flying solo. And that's what I have to offer here. You make a donation to the Father McKenna Center, you get to go to the front of the line as far as the emails are concerned. You can do that directly, or you can do it through Patreon. In any case, you go to the support page at www.riskparityradio.com and you can figure it out from there. Let me know if you do and I will move your email to the front of the line. Cool. Now getting to your question, let's see how we can reason through this. You have two assets, you want to make contributions to them. end up with a 50/50 split, which you either achieve by rebalancing every year or doing it along the way. Now, what if we assume that these two assets are in fact cash and the stock market, S&P 500? What do we know about those assets over time? We know that an investment in the stock market is going to outperform cash over time. But we also know that an investment in the stock market is going to be more volatile than the cash over time. Now we know from many other studies who have compared dollar cost averaging with lump sum investing at the beginning of a period in stocks and have found that lump sum investing at the beginning of the period has a higher probability of yielding a higher return in the end. even though it's more volatile. What does that tell you with this if you're planning on getting a 5050 split between stocks and cash that you're putting into this thing? Well, you know there's a higher probability that the stock portion will outperform the cash portion in any given year, although it's not certain in any one year. Knowing that higher probability in terms of performance, you would want to keep putting at least as much into the stock side, even if it's outperforming cash, as it will in most years. So in that respect, you'd be better off putting the full 50 into the stock side of this, even if the stocks are performing poorly, and that's your option B. Because in option A, what you end up doing most of the time when your stocks are outperforming the cash is investing more and more into the cash. And so if you expand that idea out to many assets, it would say you would want to continually make sure you're putting at least the target percentage of the likely best performing assets in, which would be option B. Now that is likely to get you the best performance, but if you are more interested in the volatility issue of this, then you are going to want option A because that is, by definition, putting more into the lower volatility assets earlier on. And so the portfolio overall will have a lower volatility if you go with option A. Now, as a practical matter, this is probably irrelevant. And the reason it's irrelevant is because the variance of these assets, particularly if you're talking about the of the stock market over the course of just one year is so high that if you're going to fix the whole thing at the end of one year, it's probably really not going to matter all that much, particularly if you're adding to a large pile of assets that you've already accumulated. And so you're only talking about the marginal addition to the portfolio. And the other advantage that option A has over option B is it's much more tax efficient. you're probably never going to have to sell something to rebalance or not have to do as much selling to rebalance as you would if you were to use option B. Overall, this is the kind of question that seems like it could be important in theory, but when you get to dealing with it in practice, it doesn't have much meaning. And it is precisely because you're almost never going to be in a situation where you are only investing for one year. a set amount or have a big lump sum to invest all at once. In most circumstances, you are looking at a steady stream of savings, if you will, coming off going into a growing pile of investments. And after that pile has grown to a significant extent, the further contributions to the portfolio are simply overwhelmed by the general returns of the portfolio. So, I would probably gravitate towards option A if I was doing this manually because it would result in fewer transactions overall and then fewer potential tax consequences. If I was automating it, I would probably just go with option B because then I don't have to look at the portfolio every month to figure out what's low and what's high and what to do. In either event, the differences are probably going to be trivial. so pick the one that's most convenient for you. Ooh, how convenient. And maybe I'll reward you with a happy little tree or two.

Mostly Voices [22:04]

Maybe there's a happy tree, evergreen tree, he lives right there. Start with just touching the canvas, use just the corner of the brush, just the corner, and begin pushing, making the bristles bend slightly downward, See there? Look at that, isn't that a nice little tree? And he lives right here in this brush. All you have to do is sort of push him out. Pull it through the paint, wiggling it, see? Wiggle it. Other side, pull it through, and wiggle it. Let's have another one. Maybe he lives, zoop, right there. Just make a decision and drop him in. Wherever you want him. There he goes. There he goes.

Mostly Uncle Frank [22:54]

Because at Risk Parity Radio, we don't make mistakes. We have happy accidents. That one's obviously for your wife. But thank you for your support and thank you for your email.

Mostly Voices [23:09]

I swear by the moon and the stars and the sky. I'll be there, Cal. I swear. Like the shadow that's by your side. Cal, swear to God, I'll be there. Last off. Last off, an email from Eric from Cincy. I'm living on the air in Cincinnati.

Mostly Mary [23:42]

And Eric from Cincy writes：Dear Uncle Frank, I am no fan of tips and I have listened to you speak your mind regarding tips and investing on several recent podcasts. I want you to be nice until it's time to not be nice. I understand that you like to point out that tips don't do what they are supposed to do with respect to inflation. You had only one job. I also understand that you feel one of their main shortcomings is that the bond component of these instruments far outweighs the inflation protection component. Other than speaking to the bond component of TIPS, I am not sure I have heard you give reasons as to why TIPS don't perform as advertised. I don't like TIPS because they track a government measure of inflation that has very little bearing on my personal inflation rate. In fact, everyone's inflation rate is personal and will vary widely. Very few people will experience average inflation. Furthermore, the cost of college, a car, and health insurance have far exceeded inflation rates over the last decade, and these are major purchases for many individuals. Furthermore, owner's equivalent rent doesn't exist in the real world. And don't get me started on hedonic replacement. Didn't you get that memo? Are you really enjoying that ground chicken patty, or would you rather have a steak? Could the fact that government levels of inflation have very little bearing on how people actually experience inflation in the real world be another reason why tips are terrible? They aren't really protecting anything, even though protection is in the name. Thanks for a great podcast, Eric from Cincy.

Mostly Uncle Frank [25:19]

Well, what can I say?

Mostly Voices [25:22]

You are correct, sir, yes. Yes, it's true.

Mostly Uncle Frank [25:26]

The way inflation is measured is kind of an ad hoc method that pulls together various sets of data and asks that weird question of homeowners as to how much they think they could rent their house for as a basis for the housing data. And so it's very true that personal inflation is personal. And yours is likely to be higher or lower than the official standards that TIPS are based on. Suppose the bad news is that if you have children with their kinds of expenses or some kind of expanding family or lifestyle, you're probably more exposed to inflation than somebody who doesn't have those issues. What have children ever done for me? And then after you retire, you do have more control over your personal rate of inflation. At least if you can get rid of your children, I don't care about the children. And where I always come back on this is TIPS are really not that great at fighting inflation, and they certainly are not going to hedge a portfolio against inflation. They are bonds, and all they will do is perform better than nominal bonds if inflation is more than people expected when the TIP or nominal bond was purchased. because there already is an inflation expectation built into any nominal bond. And so the difference between the price of a TIP today and its corresponding nominal bond tells you what that expectation is for the next period. So if you're buying a five-year TIP and you're getting a 1.5% rate and the five-year bond is at a 5% rate, the inflation expectation is 3.5% for that five-year period. If it's more than that, you're better off with the TIP. If it's less than that, you're better off with the nominal bond. And so, as we've discussed a number of times, and as reflected in that nice article from Bill Bernstein that I found that came out a few months ago, TIPS really don't do anything particularly well and don't have a good place in a diversified portfolio because there's always something else that will do the job better, whether that's being a bond or hedging a portfolio against inflation. So as Bernstein suggested, really the best and only use for them is if you are constructing some kind of a bond ladder, but you should keep that separate and apart from the rest of your portfolio and look at that as a supplement to something like Social Security. If you really want something that's going to actually hedge inflation, it's going to be something like managed futures or commodities or some of the equities, particularly energy that are involved in the production of commodities and other things that benefit from inflation. A big sack of McDonald's McRib sandwiches.

Mostly Voices [28:35]

Grilled pork and that sassy sauce. Chome.

Mostly Uncle Frank [28:39]

Anyway, I think we've beaten that dead horse a little bit too much. But I'm sure we'll be beating it again within the next month or so. The beatings will continue until morale improves. And thank you for your email. And 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 and 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. Okay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off. And it's gone. Uh, what? It's gone. It's all gone.

Mostly Mary [29:43]

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.