Mostly Voices [0:00]

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

Mostly Mary [0:18]

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

Mostly Uncle Frank [0:36]

Thank you, Mary, and welcome to Risk Parity Radio. If you 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 [1:31]

Along with a host named after a hot dog. Lighten up Francis. But now onward to episode 299. Today on Risk Parity Radio, we have a rebalancing to talk about for one of the sample portfolios. But before we get to that, I'm intrigued by this how you say, E-mails. And? First off. First off, we have an email from Builder Man.

Mostly Voices [2:05]

Looks like a tricky job, Bob. Not when you have a good team, Mr. Bentley. Okay, team, let's get to work. Can we fix it? Yes, we can.

Mostly Mary [2:17]

And Builder Man writes, Dear Uncle Frank and Aunt Mary, thanks for your podcast and all you do. I've donated to the Father McKenna Center in support of your efforts there. Yeah, baby, yeah!

Mostly Voices [2:28]

Looks like a great cause.

Mostly Mary [2:33]

I'm a 50-year-old construction executive who plans to work for another six to 10 years. I have two kids, and they should both be out of college in five to six years, and I can't imagine wanting to work past the age of 60 when I reach retirement age as defined by my company's 409a deferred compensation plan. Reaching retirement age as defined by the plan affords more flexibility as to how or really when the funds are paid out of the plan, which allows me much more control over annual taxable income. So for now, I'm in accumulation mode, but I'm learning all I can about risk parity concepts and safe withdrawal rates. My portfolio is fairly traditional and pretty aggressive. I do have about 12% leverage, 1.2 1-2 at times, mostly through the use of NTSX. My macro allocation is currently 87% stock, 22% bond, 3% alternatives, mostly gold. My question is around how to think about one non-traditional asset that I currently manage and stand to inherit. A meaningful amount of good Iowa farmland, corn and soybeans, which is cash rented to a long-term tenant. I like the concept of the Golden Butterfly portfolio, but it feels like I will already have an asset, farmland, that could zig when the rest of the market zags. How would this farmland affect your view on holding things like gold, long-term treasuries, managed futures, commodities, etc? If I added in the farmland today, it would be about 46% alt, including farm, 12% bonds, and 49% stocks. Of course, over the rest of my working years, I would expect the stock and bond percentages to grow because I am actively adding to them. In your mind, what does the farmland take the place of in a golden butterfly style portfolio, if anything? How would you model the farmland in portfolio charts and portfolio visualizer? In case it's of any use, I am attaching a recent white paper on farmland investing from Acre Trader. I realize they are part of the milkshake crowd trying to promote a product, but I thought it was interesting nevertheless. And I have a straw. There it is. That's a straw, you see. Watching.

Mostly Voices [4:54]

And my straw reaches across the room and starts to drink your milkshake. Thank you again.

Mostly Mary [5:09]

I considered myself fairly financially astute, but your podcast has taught me a lot already, Builder Man.

Mostly Voices [5:14]

Bob, are you sure you're going to be able to run the farm and repair the barn? Don't you worry, Travis. Can we catch them? Yes, we can.

Mostly Uncle Frank [5:25]

Well, first off, thank you for your very generous contribution to the Father McKenna Center. I won't say what it was, but it was quite substantial and we very much appreciate it. The best Jerry, the best. And to remind all of you, we don't have any sponsors on this podcast. We just have a charity that we sponsor.

Mostly Voices [5:46]

Inconceivable.

Mostly Uncle Frank [5:50]

And if you donate to the charity, you get to go to the front of the line as far as the emails are concerned. Like Builderman has done here.

Mostly Voices [5:56]

Yes, we can.

Mostly Uncle Frank [6:00]

And so if you want to do that, you can do that through the support page. www.riskparityradio.com and you can either donate through Patreon, we've had that set up, or you can do it directly to the Father McKenna Center. But if you do and you send me an email, please flag it so that I can move you to the front of the line. In full disclosure, I am on the board of the charity and am its current treasurer. Now getting to your question, this gets at a bigger question of how we organize our assets in retirement versus our expenses. And so for every asset there's actually two different ways you could model it. You could model the asset as part of a portfolio that you are managing and rebalancing and taking some money out of periodically. or you could just look at it as a stream of cash flows. Now, some assets, that's all they are. Social Security is that, a pension is that. If you have some other illiquid thing that just pays you income, anything that falls into that category can be that. And so the way you would want to go through this calculation is you take your annual expenses after you've calculated them, then you're going to subtract off anything that constitutes an annual cash flow, whether that's Social Security or a pension or some other liquid stream of money that you expect to come in. Could be a part-time job too. That gets you to a net expense number, and then it's that net expense number that needs to be covered by the portfolio that you're holding. Now, technically, you could do this essentially with any asset that pays an income. So you could take bonds, for example. and particularly in the form of a bond ladder, and move that into this income or payment stream category, and just look at them in that light and not consider them part of your portfolio. In which case, you'd be looking at that stream of income plus the principal you would put into it if you're spending down a bond ladder. And so you just subtract that from your annual expenses, which leaves you a net expense number to be dealt with. elsewhere. All right, now let's talk about how this plays into your specific situation with Iowa Farmland.

Mostly Voices [8:33]

Let's sing the brand, the lie away, Yahweh, Yahweh, Yahweh, our love is stronger every day, Yahweh, Yahweh, Yahweh. So come along and join the throng, several hundred thousand strong, as you come to sing the song, Yahweh, Yahweh, Yahweh, here I am, away.

Mostly Uncle Frank [9:04]

Highway, state of all the land Joy on every hand from Iowa, Iowa, Iowa, Iowa, that's where the corn grows As you may or may not know, I actually grew up in Iowa in Cedar Rapids, Iowa Born in Kansas, raised in Iowa Well, Laddie, frickin' die! I don't think most people appreciate how integral an ordinary agribusiness is considered there. I was just back there for my 40th high school reunion about six weeks ago.

Mostly Voices [9:32]

You know, at my age, the mind starts playing tricks. So, ahhhh, death! That's only the cat. Oh.

Mostly Uncle Frank [9:39]

I was listening to the radio and they say, now let's talk about markets. And in most areas of the country, they would say the S&P 500 was up or down, and the NASDAQ was this. That's not what they talk about in Iowa. In Iowa, they talk about the price of corn and the price of soybeans, primarily, with some cattle and hogs thrown in for good measure. And there was no mention of anything that resembled a stock market in that report. Forget about it. But what you have here is a classic kind of asset that is probably best modeled on its income and not not on its value in terms of your retirement planning. And that's because, as you've said, you have a long-term tenant that you've rented the property to, so you know what that stream of income is. So the easiest way to model this is to not consider it part of your portfolio, but to consider it as a separate income stream, in which case you are simply just taking your annual expenses, subtracting this net income stream off the top of that and not modeling it as part of your portfolio. Now, when would you stop doing that? Because you could also model it as part of the portfolio. But if you're going to model it as part of the portfolio, you are essentially saying to yourself, this asset is up for sale. It is salable because in your managed portfolio that you are decumulating out of, you are selling pieces of that portfolio all the time. time. And so particularly in a case like this, if you are not planning on selling that land, you would not model it as part of your portfolio. If you were planning on selling it, particularly in the next few years, then you could do that. I did not know that. I did not know that. Now, if you're going to do that, though, you can't subtract the net income from the total annual expenses. You either put it in one category or the other, you don't count it in both places. No, I think in the circumstance it would be very difficult to model this in a portfolio because it's such a large percentage of a portfolio. What it is essentially is an agricultural REIT. And there are agricultural REITs out there. One of the largest ones is called L&N, the Gladstone Land REIT. and you could model it as something like that. But if you do a model where that is half of your portfolio, basically you're just looking mostly at the performance of that and the kind of the information you'll get out of a model like that, it's going to be fairly useless because it's not very well diversified with that one REIT occupying that huge swath of your portfolio. So you can certainly try something like that in Portfolio Visualizer. But I think it's going to be a kind of a garbage in, garbage out exercise, and I would not therefore use that form of modeling for what you've got here, because it seems to be much more likely that you will simply hold on to the land and use the income as an income stream. And if you are modeling this as an income stream to reduce your gross expenses to a net expense amount, then you don't have to do anything to change the portfolio because the portfolio is only covering that net expense amount. The only question there would be, do you think this income is likely to be variable? In which case, then the portfolio needs to cover more or less of a net expense amount going forward. I would presume it's probably going to be pretty stable on a long-term tenant. And if anything, it's probably gonna go up in the future. Because we are talking about the best farmland in the world here.

Mostly Voices [13:31]

People will come, Ray. They'll come to Iowa for reasons they can't even fathom.

Mostly Uncle Frank [13:39]

My sister actually bought a small farm near Decorah, Iowa.

Mostly Voices [13:43]

They'll turn up your driveway, not knowing for sure why they're doing it. They'll arrive at your door, as innocent as children longing for the past. And also rents out the land, although it's not very substantial.

Mostly Uncle Frank [13:59]

But now this does lead me back to a general observation about assets you might be holding. And essentially they can be categorized into three categories that are useful to consider. One is things that are illiquid but generate an income stream like this farmland, like a pension or annuity, or rental property, and you can even model a part-time job like that. Another one is things that are illiquid that don't pay an income. That would be your collections of artwork, your residence, things like that.

Mostly Voices [14:39]

Popeil's Pocket Fisherman compact enough to fit glove compartment or your pocket. It's Rod, Real, Line, Bobber, Hook, the whole thing.

Mostly Uncle Frank [14:46]

And then finally, what we mostly talk about here are things that are both liquid and may or may not generate an income. Once something is liquid, you don't care whether it generates an income or not. You care about its total return because you can sell pieces of it. And in fact, for a liquid asset, you would prefer that it not generate income and keep that total return in the form of a capital gain, because it's easier to manage and better for tax purposes. Now obviously some illiquid assets, like a plot of land or other real estate or a business, could be sold and converted into liquid assets. And you could go the other way too. You could take some of your liquid assets and go buy a rental property or something like that. But the biggest takeaways I get from thinking about assets like this are these. That in order to build and preserve wealth, which you really want to own, are things that are either completely liquid or if they're not completely liquid, they are income generating. Those are the two asset classes you want to hold. You do not want to have most of your wealth tied up in illiquid assets that do not generate income. and that is fundamentally actually the difference between wealthy people in the United States and middle class people in the United States. That wealthy people tend to hold most of their assets in those two forms, either liquid or if it's illiquid, it's income generating. Middle class people tend to hold lots of their assets in illiquid, non-income generating things. mostly their houses, but also automobiles and other vehicles and collections and other things that can't easily be sold and are not generating income. That's not an improvement. If you want to be wealthy and remain wealthy, minimize your exposure to those things in your life. Fortunately, it does not appear that you have these problems, Builder Man. It looks like you are in very good shape and should be able to pull the plug anytime you're ready, which usually doesn't feel comfortable until you get your kids at least through the schooling you had planned to pay for.

Mostly Voices [17:11]

Donate to the Children's Fund. Why? What have children ever done for me? But hopefully that helps.

Mostly Uncle Frank [17:19]

Thank you for your donation and thank you for your email. Second off. Second off, we have an email from Drew.

Mostly Mary [18:01]

And Drew writes, hi Frank, thoughts on this from Ray Dalio?

Mostly Uncle Frank [18:09]

All right, Drew has linked to an article by Ray Dalio about investing in cash these days or holding more money in cash these days. And Drew also goes to the front of the line, although sorry I missed you the first time I saw this email. Because Drew is one of our Patreon contributors to our charity, the Father McKenna Center. And thank you also for your generous donations to that. Yes! But anyway, this article is interesting because it's an example of stuff that is interesting, but we probably should not follow or pay heed to because it's not really part of our process. our decision making process for investing. And what is that process? The process that we employ here is a naive diversification where you put together a portfolio in certain allocations that you expect will perform decently over a long period of time and you just maintain that for a long period of time rebalancing periodically. Now the other option, the sort of hedge fund guy option, is to be constantly adjusting your allocations in your portfolio based on market and other factors. What we know is that very few people can do that consistently and outperform static portfolios. And while Ray Dalio is one of the best at it, even he indicates this is probably not something that you really want to be following. basically his observation in this article is that now with interest rates much higher than they were a couple of years ago, cash looks a lot more attractive to invest in by cash he's talking about zero to two year bonds and money markets, etc. The only problem you always have if you're going to shove your money one way, what are you selling to increase that investment? And so I think just reading The last couple paragraphs is instructive, which I'll do here right now. And he writes, My approach is pretty complicated because I look at individual companies slash stocks, earnings yields, dividend yields, and earning growth prospects relative to their prices. I also look at their supplies and demands individually. Then I put this together to get my view of the total market I'm looking at, e.g. the S&P 500. You can do this more simply, albeit less precisely, by looking at the market yield as a whole. So what does that now show? It shows the stock market offers about a 5% to 5.5% expected return, which is pretty low in relation to bond yields, especially because bond yields could go higher, which would tend to make stocks go lower. This makes the cash return, which has virtually no price risk, look pretty good relative to the prospective stock market return, as well as relative to prospective bond returns. Since none of these are precise, I could see bond yields go to 5.5% or 6% and stock yields rise even more. Hence, I could see bond and stocks falling commensurately. Cash offers a good return without price risk. It also keeps my money as dry powder, so cash looks pretty good to me. To reiterate, there is nothing precise about these sorts of calculations. So, deviations around these estimates are often large. For that reason, I like to take action when the prospective return differences are relatively extreme as they were when rates bottomed out and I said cash was trash. I probably gave you just about enough to be confused and dangerous to yourself.

Mostly Voices [21:46]

Dogs and cats living together, mass hysteria.

Mostly Uncle Frank [21:52]

But I did give you the best brief answer to the question about how I think about these things. I hope it helps you. And that really is what I conclude out of reading things like this, that trying to make investment decisions by following a hedge fund's person's personal recommendations at a given time and a given date without any precision involved is not a good investing process and is not likely to yield consistent or good results. Because if you were to act on this, then you should have also acted on Ray Dalio and Bridgewater's recommendation two years ago, which was to go heavy into Chinese stocks and Chinese debt. Because there's no reason to accept this recommendation and to have rejected the other one when they're from the same people essentially using the same kinds of methodologies to evaluate whether something's cheap or expensive. And obviously, if you would have done that, you would have had bad results. So what are you supposed to do now? Now sell all the Chinese stocks that you bought two years ago and put it all the money in cash because Ray Dalio said so, or this is his latest and greatest statement. And then how do you evaluate or incorporate what all of the other famous investors are doing on any given day, since they're all over the map about various things? You can see that that kind of a process becomes very incoherent very quickly because there isn't any even way of balancing or weighing as to which advice to follow, how much of it to follow, when to stop following it, and how much changes in your portfolio you should make on a particular statement made by a particular person. So while things like this are interesting to read, they should not be meaningful in your decision-making process long term, because if they are, you probably actually lack a coherent process. The other thing you need to understand about reading these things or hearing them out of financial media is that frequently, whoever saying them is essentially doing what is known as talking your book. That they have taken a position in a market and so now that they've already taken that position and may have held it for some time, they are going to say things that are essentially in favor of that position. Now they're going to sell out of that position at some point in time or reverse it. They're not going to tell you when they do that. That's their secret sauce. then they'll take a new position and then they will hype that position as long as it seems useful to them. And some of that's calculated, but a lot of it's just human nature. If you've taken a position on something, you tend to defend it. But following such recommendations then is also indicative of a bad process. As Warren Buffett is often quoted as saying, Never ask a barber if you need a haircut, because obviously they're always going to say you do. Never ask a realtor if you should invest in real estate. Never ask an insurance salesman if you should buy more insurance.

Mostly Voices [25:15]

Tell me, have you ever heard of single premium life? Because I think that really could be the ticket for you.

Mostly Uncle Frank [25:24]

And never ask a hedge fund operator what you should invest in right now. because all they're going to tell you is whatever their last trade was, but they won't tell you when they plan to exit or when you should exit. And so if you're following that or doing something like that, you effectively end up asset chasing or fund chasing. It's the same bad process that amateur investors follow when they look at one, three, five or ten year performances and they choose funds based on that metric. without regard to what the thing is invested in or whether they really want that thing or not. And those are exactly the kinds of processes by which amateur investors tend to underperform even the assets they hold themselves because they are essentially selling low and buying high over and over again and just chasing. Hopefully that helps and thank you for your email.

Mostly Voices [26:20]

Last off.

Mostly Uncle Frank [26:24]

Last off, we have an email from my contact info.

Mostly Voices [26:28]

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

Mostly Uncle Frank [26:32]

And my contact info writes Frank and Mary.

Mostly Mary [26:35]

In fact, the below paragraph from Professor DeMottorin's recent post meshes with some of the concepts you discuss. The notion that there is smart money i.e. that there is an investor group that is somehow wiser, more informed, and less likely to act emotionally than the rest of us, and that it earns higher returns than the rest of us is deeply held. In my view, it is a mirage. What a spot to pick for a mirage. Since every group that is anointed as smart money ultimately ends up looking average in terms of behavior and returns when all is said and done. It happened to mutual fund managers decades ago, and it has happened to hedge funds and private equity over the last two decades. For those who are holding onto the belief that venture capitalists are the last bastion of smart money, it is time to let go. While there are a few exceptions, venture capitalists for the most part are traders on steroids, riding the momentum train and being ridden over by it when it turns.

Mostly Voices [27:47]

When I say whoa, I mean whoa.

Mostly Uncle Frank [27:50]

All right, I will link to this little blog post from Oswath de Modoran in the show notes, but he is somebody that has an extremely high signal to noise ratio, unlike most of the people that you commonly here in financial media and elsewhere. And I think he's just echoing what we know from lots of studies and data that it is very difficult for managers, even professional managers, to beat markets over time. And that even if there is some edge in some particular area for a sliver in time, usually when enough people get involved, the edge goes away and things revert to the mean. Mean reversion in terms of outperformance by managers is something that is well documented and is one of those things where mean reversion really works well to explain what's going on. And this article is going after venture capital, which, you know, in recent decades has the reputation of being the place to be, which has attracted lots and lots of money, but you can also see lots of boneheaded things going on there and kind of bad incentives going on there. One of the most recent good examples of that was Sequoia Capital's investment in FTX and their glowing article or promotion of Sam Bankman-Fried at the time. And that is one of the problems that is kind of endemic in venture capital now, that these firms that do a lot of it have developed such names that a lot of what they are doing is making private investments then essentially talking their book to get more people interested in those investments to hopefully raise the price of them simply by talking them up. So there's a lot of marketing going on there and just as much marketing as there is identification of good investments. Always be closing. And that investment in FTX is an obvious example of that, which they've now marked to zero. It was never a very good investment, but it was a very good story to put out there and hopefully get a greater fool to buy into it. Because eventually what venture capitalists are wanting to do is offload those things that they invested in at a much higher multiple than what they paid for them.

Mostly Voices [30:21]

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

Mostly Uncle Frank [30:28]

So there's a lot of salesmanship going on there in addition to the actual investing.

Mostly Voices [30:33]

A guy don't walk on the lot lest he wants to buy.

Mostly Uncle Frank [30:37]

And this is also why if you are the retail investor looking to get into venture capital or private equity or anything like that, you are probably the sucker at the table unless you have some specialized knowledge. Because the only reason that you're getting an opportunity to get into that is because they are trying to round up some greater fools to get into something. and sell an interest to them. I know that's very cynical, but that is often the truth in these kinds of things. Let's talk about something important. Coffee's for closers only. Anyway, the article itself is about the company Instacart going out for an IPO and how the venture capitalists are going to make money off that and reveals a lot of these kinds of issues. That by the time it gets to IPO stage, it's probably had all the value wrung out of it, at least for some time. That's the fact, Jack! That's the fact, Jack! At least that's the way venture capital and IPO world works these days. Anyway, interesting topics, and thank you for your email. Now we're going to do something extremely fun. And we've got a couple of extremely fun things here to talk about. The first one is that our good friend Justin over at Risk Parity Chronicles is now doing a monthly Risk Parity Roundup feature where he talks about things he has read and heard, including things from this podcast. You are talking about the nonsensical ravings of a lunatic mind. Basically, he's doing my work for me. Looks like you've been missing a lot of work lately. I wouldn't say I've been missing it, Bob. But if you listen to this, you'll probably find that interesting and informative, and it does give little summaries if you do not want to listen to this whole podcast about parts of it that you might be interested in that have come out in the past month. The Inquisition! Wanna show the Inquisition! Here we go! And I will be linking to those regularly now in the show notes when they come out. You're too stupid to have a good time! And thank you, Justin. And we also had a rebalancing for one of our experimental portfolios this month, which we took care of on Monday. And the rebalancing rules for this portfolio, the Accelerated Permanent Portfolio, are set up such that we look at it every 15th of every month and if one of the allocations to one of the assets has varied by a net of 7.5%, then we will rebalance the entire portfolio. In this case, with the bad performance of bonds over the past month and months, we did trigger a rebalancing of the accelerated permanent portfolio because the percentage holding in the bond fund TMF had dipped from 27.5% to below 20% in the portfolio. So we bought and sold things to get them back to their initial percentages, which meant selling $238 worth of gold, selling $21 worth of preferred shares, PFF, selling $332 worth of UPRO, the levered stock fund that's in there, and then buying $534 worth of TMF, that bond fund. And I put this all up in the notes on the web page where we talk about these portfolios, and it will also be reflected in the next time we put up the weekly summaries. But I thought that would be interesting for those of you scoring at home. Not that we would advise you to do experiments like those experimental portfolios. at home. But now I see our signal is beginning to fade. Gonna be going back on hiatus this weekend. We have things to do with our adult children. I don't care about the children!

Mostly Voices [34:52]

But I will update the website as I am able.

Mostly Uncle Frank [34:57]

In the meantime, if you have comments or questions for me, please send them to frank@riskparityradio.com that email is frank@riskparityradio.com Or you can go to the website www.riskparityradio.com, put your message into the contact form and I'll get it that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, give me some stars, 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. People will come, Ray. They'll come to Iowa for reasons they can't even fathom.

Mostly Voices [35:42]

It reminds us of all that once was good. And it could be again. Oh, people will come, Ray. People will most definitely come.

Mostly Mary [35:59]

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.