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 [0:36]

Thank you, Mary, and welcome to Risk Parity Radio. If you have just stumbled in here, you will find that this podcast is kind of like a dive bar of personal finance and do-it-yourself investing. Expect the unexpected. There are basically two kinds of people that like to hang out in this little dive bar. You see in this world there's two kinds of people my friend. The smaller group are those who actually think the host is funny regardless of the content of the podcast. Funny how? How am I funny? These include friends and family and a number of people named Abby. Abby someone.

Mostly Voices [1:22]

Abby who? Abby normal. Abby Normal.

Mostly Uncle Frank [1:34]

The larger group includes a number of highly successful do-it-yourself investors, many of whom have accumulated multimillion dollar portfolios over a period of years. The best, Jerry, the best. And they are here to share information and to gather information to help them continue managing their portfolios as they go forward, particularly as they get to their distribution or decumulation phases of their financial life.

Mostly Voices [2:04]

What we do is if we need that extra push over the cliff, you know what we do? Put it up to 11, exactly.

Mostly Uncle Frank [2:12]

But whomever you are, you are welcome here.

Mostly Voices [2:15]

I have a feeling we're not in Kansas anymore. But now onward, episode 300.

Mostly Uncle Frank [2:23]

Episode 300, who would have thunk it?

Mostly Voices [2:27]

We have been charged by God with a sacred quest.

Mostly Uncle Frank [2:31]

And featured on episode 300, we have three emails from two Marks and a Cody.

Mostly Voices [2:41]

Where's that? I got 10 pebbles in a microphone. Where's that? And so without further ado, here I go once again with the email. And? First off, we have an email from Mark. All hail the commander of his majesty's Roman legions, the brave and noble Marcus Vindictus. And Mark writes, hello Frank and Mary.

Mostly Mary [3:11]

While I feel a little bad that I was wrong about Frank's personality trait in my last email, Mary's laughter was probably my favorite moment of the podcast so far. The FBI's most wanted woman. Her photo is hanging on every post office wall. If you have any information about this woman, please contact the nearest police station. I would love to find a way to make Mary laugh like that again, but honestly, it wasn't my intention to be funny last time. So we will see if that is possible in the future. I also wanted to note that while I have given directly to the Father McKenna Center directly in the past, I just became a Patreon member as well since that felt more convenient as an ongoing solution. I noted that you engaged with the Jeppy topic again in episode 298 in response to a listener question. Since my last engagement with you on Jeppy, I have done a fair amount of due diligence on the fund. I have come to the conclusion that Jeppy is probably one of the most opaque and misunderstood highly marketed funds available today. You may already understand everything I am about to clarify and are just trying to keep things simple, but I think the differences below are pretty important for understanding the true risk of Jeppy, so I wanted to share. Here is what I understand to be true about Jeppie. I understand why you are categorizing Jeppie as a buy-write fund, but the Jeppie Fund itself does not sell call options at all. You noted that Jeppie doesn't sell call options on its core holdings, but the Jeppie Fund itself also does not sell S&P 500 call options either. I know the summary prospectus lends that impression, but it is not the case. Instead, JPE purchases exchanged linked notes from counterparties, mainly large global banks. It is these exchange linked notes created by a large global bank that are selling call options. Because here at GLOBO Gym, we're better than you, and we know it. And these ELNs have contractual commitments to the JPE fund that generate income for JPE. This has a couple of negative consequences. Unlike a traditional buy right fund, Jeppy has significant counterparty risk. When a regular buy right fund sells a call option, they get their money within a couple of days or less after settlement of the transaction. But Jeppy is exposed to counterparty risk with the bank selling ELNs for the term of the ELN contract with that bank. And as we have seen time and time again, that some of these global banks make better decisions than others. Shirley, you can't be serious. I am serious.

Mostly Voices [6:08]

And don't call me Shirley.

Mostly Mary [6:12]

The contractual terms of these ELNs are almost completely opaque and difficult to penetrate, at least for me, because I have tried. What do they guarantee to JPE? Are the other funds within the JPE fund exposed to risk? It is still unclear after many Google searches. To get more clarity on the ELNs, I engaged with JPMorgan directly, and it took several interactions with JPMorgan Morgan to get an answer. Specifically, I wanted to know if the 20% of JePI that are ELNs obligated or put at risk the assets in the 80% equal weighted low volatility fund within JePI. Because if they didn't, JePI could still be pretty great even if the ELNs had significant risk. Initially, the JP Morgan rep told me that was exactly the case. But I poked on him. and asked him how only 20% of the fund was generating such high income returns. He asked to get back to me, and after some time running down the answer within JP Morgan, he came back to me and clarified that yes, the ELNs that Jeppy is buying can have leveraged losses that would require JP Morgan to sell the assets in the 80% of the fund to cover the losses of an ELN that goes bad. Again, this is significantly higher risk than selling a covered call option since you have no risk of negative loss when selling a covered call option and are just surrendering potential gain. My point here is not that a buy right ETF selling covered calls directly is better than Jeppie. Those funds have their own degradation issues, as you have pointed out. My point is that Jeppie is obscuring a lot of risk while chasing the attention getting income returns that they have been touting and characterizing it as a buy right fund May give investors a false sense of security about Jeppy's Well, first, thank you for your generous donation.

Mostly Uncle Frank [8:07]

As most of you know, we do not have any sponsors on this podcast, but we do have a charity, the Father McKenna Center, which serves homeless and hungry people in Washington, D.C. And if you donate to the charity, you get to go to the front of the email line.

Mostly Voices [8:26]

How about that? Top drawer, really top drawer.

Mostly Uncle Frank [8:31]

And you can do that either directly or through our Patreon page, either one you can access at www.riskparityradio.com on the support page. And if you do, please flag that in your email so I can move it to the front of the line. Yes! Now getting to your email. Well, thank you for your investigation into Jeppy, a very popular product out there now, largely due to lots and lots of marketing of it.

Mostly Voices [9:03]

A guy don't walk on the lot lest he wants to buy. They're sitting out there waiting to give you their money.

Mostly Uncle Frank [9:10]

Are you gonna take it? And as I've said before, we are on kind of version 3.0 of these kind of funds which date back to the 1980s. And in each case within about a decade you see them underperform and decay over time based on their structures. And then they kind of go away and get reinvented at some other point in time and remarketed to the Hoi Polloi who all get excited about them once again.

Mostly Voices [9:39]

Am I right or am I right or am I right? Right, right, right.

Mostly Uncle Frank [9:46]

As I've said before, I don't think I've seen anything that would suggest that Jeppy or any of the other new ones are going to not face the same fate over time. It is interesting to note how they've tried to do something different here with these exchange linked notes, but to me it's just another layer of complication. And yes, if you add another layer of complication, you add another layer of risks. And I do not know what the risks are of exchange linked notes as you've described. We don't know.

Mostly Voices [10:16]

What do we know? You don't know. I don't know. Nobody knows.

Mostly Uncle Frank [10:23]

I know exchange traded notes were once fairly popular but have gone by the wayside because they generally have their own problems with counterparty risks and other risks as you described. I don't see anything here that would give me any more confidence in Jeppi or any of these other kinds of funds. But then again, I never had any confidence in them to begin with.

Mostly Voices [10:46]

Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys? Forget about it.

Mostly Uncle Frank [10:54]

They are a highly marketed product and highly marketed because I expect this one is very profitable for JP Morgan.

Mostly Voices [11:02]

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

Mostly Uncle Frank [11:09]

Anyway, that's my story and I'm sticking with it. And thank you for your support and thank you for your email. And hopefully we can get Mary to laugh again sometime soon here.

Mostly Voices [11:21]

I'll bide my time. And as for you, my fine lady, True, I can't attend you here and now as I'd like, but just try to stay out of my way. Just try. I'll get you, my pretty, and your little dog too. Second off, we have an email from Mark.

Mostly Uncle Frank [11:52]

A different Mark.

Mostly Voices [11:55]

Who returns to Rome after winning a great victory over the Cretans at Sparta. Make that the Spartans at Cretans. And Mark writes.

Mostly Mary [12:07]

Frank, thanks as always for your wonderful efforts on behalf of DIY investors. I'm having trouble coming to the same conclusions you do on gold, chiefly due to the fact that I don't believe backtests on gold prior to roughly 1974 are useful. The characteristics that today's free-floating gold exhibit look nothing like gold when it was pegged to the dollar. This can be seen pretty clearly in Earn's toolbox, which has historical returns mapped out to 1871. Prior to 1971, it performed mostly like you were holding cash, low return and low risk. After 1971, it performs like a high volatility, low stock correlation asset with returns something similar to bonds. The trouble in concluding that gold helps with safe withdrawal rate is that the worst safe withdrawal rates of 1929 and 1966 retirement cohorts have most of the worst sequence risk years, where gold doesn't look much like the asset we see today. I would love your thoughts on how to think of gold in back-tested data and really whether any conclusions can be drawn with data prior to roughly mid-1970s. To end on a note of optimism, the current asset characteristics seem better than what was witnessed in the early historic record. Below is a CAGR analysis of different asset classes based on Earnings Database. It shows gold returns is much better than cash and competitive with intermediate bonds. Perhaps it would have been more helpful than what safe withdrawal rate analysis suggests given improved returns. Hard to say. Look forward to your thoughts, Mark.

Mostly Uncle Frank [13:50]

You're insane, Gold Member. Well, as you know, gold has an interesting history if you're considering it as an investment, because between 1933 and the 1970s, at least somebody in the United States really could not own gold or at least own it directly as an investment. and prior to 1971, gold was the same as cash in a way because it was pegged to the US dollar at a fixed rate. And that had the effect of distorting market action, if you will, in the price of gold at various times. Now, if you look in the Depression era, and shortly thereafter, if you wanted to invest in gold, you would have probably had to invest in gold mining companies who were essentially printing money when you think about it, or mining money if you will. And it's notable that between 1929 and 1933, the Homestead Mining Company was one of the best performing stocks in the entire US market and went up about 500% during that time because it was a time of deflation and if you were mining gold, you were essentially printing money in a deflationary economy, so it was worth more and more every year. And so if you had made an investment in gold miners in that era, you probably would have made out pretty well. You would have made out very well, in fact. The other very distortionary period came really in the 1960s. And this is an interesting history. The Bretton Woods system was set up in 1944, but it was only around for about 15 years before it started to show signs of failing or breaking apart. And what started happening is that although gold was fixed at a price of $35 US dollars, in fact outside the United States it began to be traded for more than that. and up to $40 or more in some circumstances. And so then what happened was the central banks of the world, the big ones, got together and formed what was called the London Gold Pool, which was designed to suppress the price of gold worldwide. And so they would intervene in the gold market to try and keep the price down. Now that arrangement went on for a few years, and then that kind of collapsed towards the end of the 1960s, when France in particular started saying it wanted to redeem at the gold window, as it were, which eventually led to the declaration in 1971 closing the gold window and then allowing gold to float and be freely traded in the United States again. And it promptly shot up in value by several times. But it makes you wonder that if you would have had a freely tradable gold back in the 1960s or before that, it probably would have been going up in value during the 1960s if it hadn't been artificially suppressed. Because we know also at that time is when they took silver coinage out of circulation in the United States because the price of silver was going up substantially, which would drive the silver coins out of circulation because they were worth more for their silver content than they were for their denominations. What that suggests is that in an alternate universe where gold was freely tradable and perhaps not pegged to the dollar, it would have gone up and down, and particularly would have gone up when the dollar tended to devalue over time. And so maybe you would not have had as big a spike in the 1970s because you would have seen more of that action in the 1950s and 1960s during the Vietnam War. Anyway, there's no real way of knowing what would have happened, but those historical events do give you some inkling of what might have happened, particularly knowing that there was a London gold pool formed out of central banks that was actively suppressing the price of gold in international markets. So I do tend to agree with you that the data post 1971 is more valid and interesting than the data prior to 1971, when you really could not trade gold in any meaningful manner in the United States, which all in all means it's much more valuable as a diversifier today than it was prior to 1971. It does present an interesting example of what was observed back in the time when Markowitz was writing his papers that if you had two assets, Asset A and Asset B, that were uncorrelated but had very low returns or no returns even, but if you put them in a portfolio and rebalance them just on their swings of being uncorrelated, you could generate a positive return that was better than holding either Asset A or B by itself. And I really think that's how you want to view it in terms of a portfolio construction that by itself it does not have very desirable attributes. But in a portfolio it performs as a defensive investment and as a good diversifier against both stocks and bonds. And from there is where it derives its value and the ability to rebalance it against those other assets over time. And so that is the sum of my knowledge in musings about it. You are talking about the nonsensical ravings of a lunatic mind. But thank you for doing the work to look all that up. And thank you for your email.

Mostly Voices [19:53]

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

Mostly Uncle Frank [20:01]

I have an email from Cody.

Mostly Mary [20:08]

And Cody writes：hi Frank, the more I play with the Monte Carlo Simulator at Portfolio Visualizer, the more confused I get. For context, I don't like gold very much because of its unproductive asset characteristics, not producing income for instance, as Warren Buffett always says. However, I think the future of US national debt and out of control spending will eventually cause the US dollar to lose value against other currencies. I definitely deserve the crystal ball clip right about now, but I'm really concerned with what we see every day there where you live in Washington, DC. Crystal ball can help you. It can guide you. That said, I'm trying to see if adding a 5% to 10% gold allocation to my portfolio would result in a better safe withdrawal rate, and it seems to do that. But then SWR and PWR get thrown out of whack with the latter being higher than the first for a 60 years FI period. Does it make any sense? Also, when I simulate some bad years in the sequence of returns risk, then things get really hairy and confusing. Could you please explain why this difference between SWR and PWR occurs, and also what is a good number of years to simulate as a sequence of returns risk, in your opinion, and how to mitigate it? Thanks, Cody.

Mostly Uncle Frank [21:31]

Well, it does seem like we have gold on the brain today. I love gold! And one thing about it is it's almost impossible to predict when it's going to perform well or not, and it does seem to be more of a crisis asset than anything else. Again, it's not something you'd ever hold as a return driver in a portfolio. It's purely for defensive purposes and for diversification. As for what goes on in Washington DC, well, most of the time it's surprisingly little.

Mostly Voices [22:10]

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

Mostly Uncle Frank [22:14]

It's basically somebody says something and then people argue about whether they should have said it and whether they should be offended by it. But most of the time not much of consequence actually happens. And part of that is just the nature of living in a Democracy with a divided government, because our government is designed to be inefficient. And that is not a bug, it's actually a feature. But it's also probably a least bad option when you consider what are the sorts of governments that you might have or might have to live under. This was the kind of thing that the ancient Greeks and Romans debated about as to what kind of government was the best kind of government or not.

Mostly Voices [23:01]

Well, the Romans had an elaborate system of aqueducts there, Sammy. They were sort of the forerunners of- Cliff, Cliff, I need somebody to help me fix the plumbing. Sorry, Sammy, strictly theory. You'll see a lot of that if you read Plutarch's Lives.

Mostly Uncle Frank [23:21]

And I commend to you the chapters about Sulla and Solon. is one of the more interesting ones. But in the worst case scenario, you end up with what is called a Polish parliament problem, which is one of the things that led to the dissolution of Poland as a sovereign state at the end of the 18th century, because anyone in the parliament could block any decision of the parliament. or something close to that, which led to it not being able to accomplish anything. We do seem to be having an example of that going on in the House of Representatives now. But I do believe they've actually chosen a speaker today. We'll see how long that lasts. Anyway, we don't need to be belaboring that or dwelling on that here.

Mostly Voices [24:11]

Forget about it. So moving on.

Mostly Uncle Frank [24:15]

Now as to your question about Portfolio Visualizer, I did try to go look up the methodologies for these calculations. Unfortunately, I could not find them. There is a very long FAQ in Portfolio Visualizer describing all of the data sources, most of the formulas, and lots of other things that are in there including a whole list of definitions. But I did not find a particular calculator for the safe withdrawal rate or perpetual withdrawal rate laid out in there in a mathematical way. I suspect that what's going on here is that if you are dealing with a data set that is shorter than the period you're calculating, and you mentioned a 60-year period, if you don't have 60 years of data, then it's going to have to reuse some of the data from some of the years to get you 60 years of data and that is going to cause a distortion. Essentially it's going to give you fewer unique outcomes and a lower standard deviation around a mean is what it comes down to. And I think this is why in these very long term calculations that sometimes we see a perpetual withdrawal rate higher than a safe withdrawal rate. That is an example of data being reused because the period you're talking about is longer than the period of data you have. Now, I have not sat down and tried to mathematically model that out, but to me that makes the most sense just knowing probability and statistics the way I do. It's not that I'm lazy. It's that I just don't care. As for a good number of years to use, I would use as many years as you have data for. but not too many more is my best recommendation there. And that's going to vary depending on which calculator you're using. So in Portfolio Visualizer, you are probably best using the shorter periods, like 30 years, whereas you can use 50 or years or longer if you're using Portfolio Charts or the Toolbox from Early Retirement Now. Now, maybe one of you enterprising listeners can Take a look at that idea I just put forth about the issue with these data sets and trying to model them over long periods where the period is longer than the data set that you have. Because I'm probably not going to embark on that spreadsheet adventure myself. I don't think I'd like another job. But hopefully I've been able to provide you at least a little insight 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 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, give me some stars, a follow, a review. That would be great. Mmmkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Voices [27:43]

Let's make it out, baby. destinations a little up the road from the habitations in the towns below. A message saw the lights turn low, jigsaw jars and they get fresh flow, pouring out drives and jamber hats, two totes and a microphone, bottles and cans, just clap your hands and just clap your hands.

Mostly Mary [28:20]

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.