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 [0:37]

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. It's a relatively small place. It's just me and Mary in here. And we only have a few mismatched bar stools and some easy chairs. We have no sponsors, we have no guests, and we have no expansion plans.

Mostly Voices [1:10]

I don't think I'd like another job.

Mostly Uncle Frank [1:14]

What we do have is a little free library of updated and unconflicted information for do-it-yourself investors.

Mostly Voices [1:23]

Now who's up for a trip to the library tomorrow?

Mostly Uncle Frank [1:27]

So please enjoy our mostly cold beer served in cans and our coffee served in old chipped and cracked mugs along with what our little free library has to offer. I have a feeling we're not in Kansas anymore. But now onward episode 306. Today on Risk Parity Radio, we're just gonna try to do what we do best here, which is answer your emails.

Mostly Voices [1:55]

You're gonna end up eating a steady diet of government cheese and living in a van down by the river.

Mostly Uncle Frank [2:03]

But before we get to that, I have had a couple of inquiries from listeners about whether I was going to do anything at the Economy Conference in Cincinnati in March of 2024.

Mostly Voices [2:19]

Baby, if you've ever wondered, wondered what ever became of me? I'm living on the air in Cincinnati. And the answer is, yes.

Mostly Uncle Frank [2:35]

Although I'm not going to do the kind of workshop that I did last time, Diana is moving me to the main stage. I feel like Bob Euker here. I must be in the front row.

Mostly Voices [2:57]

You know, one of the best things about being an ex big leaguer is getting freebies to the game. Call the front office, bingo. Good seat, sir. You're in the wrong seat, buddy. Come on. Oh, I must be in the front row.

Mostly Uncle Frank [3:07]

And I won't reveal exactly what I'm doing there yet. Because I'd like to let her be able to announce those things in due course. But she did give me a discount code for my listeners, which is RISKPARADIRADIO, all one word. And you can save 10% on the price of that conference if you're interested. That conference is very interesting. It's kind of just Diana's baby. And she calls it a party about money. It's really directed at average Janes and average Joes who are interested in financial independence. And the main stage is kind of like Ted Talks or a talk show format. She does put those all up on YouTube. And then there are a number of other activities, including some breakout sessions on all kinds of topics that she puts together. It's all at the University of Cincinnati, I think starting on March 15th. 15th this year. I'll put the link in the show notes and you can check that out. Now, Diane also just gave us a shout out on her most recent episode of Optimal Finance Daily, and it was about the topic of the difference between risk and uncertainty. And if you're interested in more of that and you came here because you heard about it there, I would go listen to episodes 4964, 66 and 120 of this program. And also more recently episodes 294 and 137, because that is an important statistical concept whenever you are considering predictions about the future and being able to discern what is likely to be predictable, like the movements of the Earth and the Moon and the stars. and what is inherently unpredictable, which is something like the weather or earthquakes or stock markets. And hopefully you can check those out if you haven't already. Or you can check them out again. There are a number of links in those episodes that you probably want to take a look at if you are interested in that topic. But now without further ado, here I go once again with the email. And... First off. First off, we have an email from Jenzo. And Jenzo writes...

Mostly Mary [5:29]

Hi, and Frank and Mary. Thanks for taking a look at my proposed 165% accumulation portfolio. I appreciate your feedback and made some tweaks as a result. I now have this portfolio established across my accounts with the leveraged assets mainly in Roth. I'm quite happy with it. One of the challenges moving forward will be staying the course during periods of underperformance. For example, this portfolio underperformed the Vanguard 8020 for four straight years from 1996 through 1999. That would be a long period of tracking error to deal with, but I'm working on building up my endurance. I also wanted to note that there seems to be approximately a 1% annualized loss in performance between a theoretical backtest of my portfolio using the pure assets via the negative cash x trick at Portfolio Visualizer versus a backtest with the actual leveraged ETF products. My conclusion is that this would be due to the ETF fees and decay, partly from that pesky UGL. However, in my judgment, it's worth it having the leveraged gold as it allows me more room for cowbell, etc. Does this 1% difference strike you as about right? Now, I have another study to share and a related question. The study is titled Beyond the Status Quo：A Critical Assessment of Lifecycle Investment Advice. The conclusion of the study, as I understand it, is that a diversified portfolio of 50% domestic and 50% international stocks gives a better result across all stages of the investing lifecycle than traditional strategies. The result is not very surprising to me, but it is a shame that they did not incorporate any alternative assets or factors. I would really have liked to see, for example, the result of a factor-tilted 50/50 domestic international during accumulation with a transition to the golden butterfly for decumulation. My question relates to the bootstrapping methodology they use. Can you explain this term? There seem to be many variations：IID bootstrapping, block bootstrapping, circular block bootstrapping, etc. These are all terms I see in studies and in the Portfolio Visualizer Monte Carlo simulator. Is there a standard? Is bootstrapping more pessimistic than using straight historical data? My concern is that the projection results we get from portfolio charts are overly optimistic because they only use straight historical data. Thanks, Genzo. All right, taking your questions in the order received.

Mostly Uncle Frank [8:09]

And by the way, this is a follow-up to episode 251, where we first discussed this portfolio that Genzo has constructed, and I won't go through all that again.

Mostly Voices [8:20]

Not gonna do it. Wouldn't be prudent at this juncture.

Mostly Uncle Frank [8:27]

But in terms of your experience that there seems to be about a 1% difference in the performance of this portfolio than you might expect. trying to model it on Portfolio Visualizer with negative cash. Yeah, I think that sounds about right. You're going to get some tracking error, if nothing else, with respect to these things. And these levered funds, some of them track more accurately than others, and I've never had much confidence in the levered gold funds like UGL. I think you find better constructions in things like YouPro, which are done using swaps contracts with banks as opposed to futures contracts. It's funny you wrote this email on November 13th and your portfolio, at least it's levered portfolio you constructed, is probably up about 20 or 25% or more since then, given what you have in it and the recent performance of small cap stocks and bonds and even gold. But that's a good example of why sticking with a portfolio you've constructed kind of through thick and thin is a better strategy than trying to market time, because I don't think anybody really predicted that the last month would have been that great of a time to be investing for the last two months. I think a lot of people who had moved things to cash or short-term bonds early in the year are probably regretting that move now since they missed the big recovery for sure. You're not going to amount to jack squat! Now moving to your next question and this is about this new study titled Beyond the Status quo：A Critical Assessment of Lifestyle Investment Advice and this is another one of these papers by Scott Cederberg and his little team there, and the first of those was featured in our episode 251. There was also a rational reminder podcast about this paper recently. I'll see if I can link to that because I also commented on YouTube about that with what I'm about to convey to you. Now, the basic conclusion of the paper is that these kind of Life cycle investment type things with glide paths, and we're talking about things like target date funds and other things that change allocations over some long period of time tend to underperform just holding the basic components themselves. And that has seemed pretty obvious to me for some time. I'm glad this paper agrees with that, and hopefully there'll be more papers like that because These kinds of products are really not good for your financial health. They just complicate things and they do not perform better or have desirable characteristics that you would want in your portfolio. Am I right or am I right or am I right? So there's really no reason that anybody needs to be using them unless they don't have a choice or they otherwise would not invest, which is why they really exist. in 401 s today as a default option for people who would otherwise fail to invest. Are you stupid or something? And you say it's a shame they did not incorporate any alternative assets or factors, including things like gold or managed futures or things like that. And it's true, they just use stocks and bonds. And I have the same basic criticism for this that I did for the last paper. and the problem is this database they're using, which they think is very sophisticated because it takes data from 39 countries over a very long period of time. But as I pointed out in episode 251, nobody actually is going to invest like they are modeling in this paper, because what they are essentially modeling is people in countries with weak currencies and weak bond markets still going whole hog 40% into those weak currencies and weak bond markets. So as I pointed out in episode 251, this terribly skews what they're looking at if you compare it what a real investor would do and a real investor is only going to invest in sovereign debt that's in the strongest currencies and the strongest bond markets. In today's parlance, you would not expect people to be investing in the bond markets of places like Turkey or South Africa or Argentina. People who are going to invest in sovereign bond markets are going to stick to places denominated in dollars or euro or yen or something like that. And because what they are modeling is not actually something that I think any intelligent investor would actually be holding It's really only of academic interest in terms of the raw numbers that it spits out.

Mostly Voices [13:38]

I'm going to say stupid is as stupid does.

Mostly Uncle Frank [13:42]

And I made that point to the Rational Reminder guys on their YouTube channel. I hope that they take a more critical look at what Cedarberg is doing, because I realize he put so much effort into doing this and constructing this, but that doesn't make it more valuable. It makes it more academically interesting and that's about it.

Mostly Voices [14:01]

Forget about it.

Mostly Uncle Frank [14:04]

This is one of the few faults that the Rational Reminder guys have is that sometimes they take an academic's work uncritically and because it comes from an academic source, they will not really criticize it or don't want to criticize it. But that usually ends up being an extremely minor flaw in what is Otherwise pretty flawless presentations over there in terms of good investing processes and debunking a lot of what goes on in the financial services industry. Always be closing. And in amateur circles. I think it's a pretty good plan.

Mostly Voices [14:43]

We should be able to pull it off this time. What do you think, Abdul? Can you give me a number crunch real quick? Yeah, give me a sec. I'm coming up with 32. 33, repeating of course, percentage of survival. Well, that's a lot better than we usually do. Alright, thumbs up. Are you ready, guys? Let's do this, LEROY DANGANS! Oh my God, he just ran in.

Mostly Uncle Frank [15:10]

But I would not place a strong reliance on anything that is using that particular database as a basis for analysis, other than the kind of comparing things amongst themselves. like they're doing with these life cycle things because that analysis is not going to be that much affected by the other problems they have with the data. And to your third question about bootstrapping. What is bootstrapping?

Mostly Voices [15:33]

That was weird, wild stuff.

Mostly Uncle Frank [15:36]

Well, bootstrapping is a description of the actual methodology one would be using to construct a Monte Carlo simulation. And so a Monte Carlo simulation is taking a whole bunch of data and then scrambling it up and coming out with a variety of outcomes or projections based on the scrambled or randomized data. The question in bootstrapping is what is the period that you are randomizing? Because you could take all of the months at issue and randomize those. You could take all of the years at issue and randomize those. or you could take like three-year periods and randomize those and you can work the data in any or multiple ways of doing that. There is no one standard for doing this. Typically, if you have enough data, you do it over a annual basis with the idea that you're probably not going to get the same months in a row. or all the best months in a row, or all the worst months in a row.

Mostly Voices [16:44]

Inconceivable.

Mostly Uncle Frank [16:48]

This is all actually explained in more detail if you go to the Portfolio Visualizer site, go to the Docs tab up at the top, Documents, and then click on Methodology. And you'll see an explanation of Monte Carlo simulations and how bootstrapping is used and what it really means in terms of Statistics. So if what I just told you doesn't make sense to you or even if it does make sense to you, go and take a look at that because it will lay out things in a more organized manner that you can read more than once. Now as to your question, is bootstrapping more pessimistic than using straight historical data? The answer is yes and no both. Because what bootstrapping does is gives you randomized outcomes that are both the worst possible randomized outcomes and then the best possible randomized outcomes. And that's why you have this range when you get a Monte Carlo simulation from the so-called 10th percentile outcomes up to the 90th to 100 percentile outcomes. Now, those outcomes at the very ends are things that have never occurred and are probably never likely to occur. And if you compare historicals, you are probably going to get something that is closer to the 50th percentile in most simulations if you have a sufficiently large data set. But that's just the difference between a straight historical analysis and a Monte Carlo analysis. I recommend doing all of these different things because the most important use of these kinds of tools is not the raw numbers that come out of them, but using these tools to compare two portfolios using the same kind of analysis, whether that's historical Monte Carlo or something else. Because really what you're ultimately interested in is which portfolios tend to rise to the top more often than other ones do, depending on whether you're looking at safe withdrawal rates or something else. And finally, looking at your last question, or really observation that I missed at the top, you mentioned that the portfolio you had constructed underperformed a Vanguard 8020 for four straight years between 1996 and 1999. But you have to realize that was a really outlier of a historical period because it was.com bubble 1.0. And so you would expect anything with a heavy allocation to equities in that period to outperform everything else in that period of time. Kind of like in this year, anything that included these largest seven stocks in the S&P 500 is going to outperform the rest of the S&P 500 and anything else that didn't. Although I note that a lot of the small cap stuff is now catching up in a hurry over the past month is up about 20% if you're looking at small cap value.

Mostly Voices [19:57]

I got a fever, and the only prescription is more cowbell.

Mostly Uncle Frank [20:04]

But yes, it's true for any small period, the portfolio that is likely to perform in the best in that period is probably not going to be the best performer in many other periods because it actually is kind of an outlier of a portfolio. That's why you really want to be considering things over 20, 30, 40, 50 years. Because all you can really tell out of these things is get a probabilistic notion that this portfolio is more likely to outperform this other portfolio in whatever metric you're interested in in the future. And you're never going to get a certainty with respect to those sorts of things. But I'm glad you were able to construct something that works for you using the principles we have here. And you say you're quite happy with it. I imagine you're even more happy with it now on December 20th than you were on November 13th. I know our eldest son took one of his smaller accounts and did create one of these kind of levered portfolios that he became very excited about. What's very gratifying to me is that One of his friends that he went to high school with and who went into finance and now works for the University of Virginia in Dowling asked him if he had any risk parity radio swag that he could have. I didn't really have anything lying around, but I did order a few mugs to give to him. But you know, you're a cool dad when you're 20-somethings friends want in on whatever you're doing.

Mostly Voices [21:41]

Yeah, baby, yeah!

Mostly Uncle Frank [21:46]

Anyway, I'm glad this is working out well for you and thank you for your email.

Mostly Voices [22:00]

Second off, we have an email from Prior.

Mostly Uncle Frank [22:04]

And prior rights?

Mostly Mary [22:08]

Hey, Frank, would Blend be considered a Fama-French factor or just value and growth would?

Mostly Uncle Frank [22:15]

Well, the answer is no. Blend is not a Fama-French factor. That is just a description of something that has roughly equal proportions of value stocks and growth stocks. or any two other factors, but it is usually applied to the value growth kind of spectrum. So what that means in practice is you really don't need to be allocating to anything that's called blend because you can just allocate to growth or value in whatever proportion you want. Effectively that will end up with a blend overall, but what's useful about keeping your value and growth separate is that they tend to perform differently in different kinds of markets or economic environments, and you want to be able to rebalance your growth and value periodically. If it's all wrapped up in one blended fund, then you can't rebalance it. And that's why having differentiated funds is important, and having funds that do the same things in the same economic environments is just overlap and overkill usually. This is why simple allocation to say large cap growth and small cap value. I gotta have more cowbell. I gotta have more cowbell. It's just as good or better than lots of other more complicated combinations of things. 'Cause you're really more interested in capturing the end of the spectrum. Than you are in plopping things right in the middle of it. Hopefully that helps and thank you for your email.

Mostly Voices [23:56]

Babies, before we're done here, y'all be wearing gold-plated diapers. What does that mean? Never question Bruce Dickinson. Roll it. Last off.

Mostly Uncle Frank [24:09]

Last off, we have an email from Matt.

Mostly Mary [24:17]

And Matt writes：hi Frank and Mary, a quick follow-up question to my last couple emails. As I have gone back and forth on the best risk parity portfolio and have discussed with a mastermind group of fired folks that I am part of, Fire, fire, fire, fire, I came across another path and would love your thoughts. I put the below into Portfolio Visualizer, and it had by far the best returns, the best safe withdrawal rate, and the best permanent withdrawal rate. Sure, it had increased volatility, but with the 10% in long-term Treasuries, this provided more than enough to weather the stock downturns. With a 4% withdrawal, the portfolio was successful over 96%, and with a 5% withdrawal, it still has over a 90% success rate. Would love your thoughts on this portfolio for a 50-year withdrawal period versus the Golden Butterfly or the Golden Ratio. I must be missing something because this seems like such an obvious choice if you can stomach the volatility. Thanks as always, Matt.

Mostly Uncle Frank [25:26]

Well, I will link to these in the show notes so people can check them out. The issue here is the limitation on the data set. For whatever reason, there are a few things in the Portfolio Visualizer data set that start at 1978 and the long-term treasury bonds are one of those things. The problem with starting at that date is that is a very auspicious date to start out as an investor in a portfolio. because there was very little bad that happened after that and a whole lot of good things that happened to both stocks and bonds throughout the 80s and into the 1990s with a couple of blips like 1987. So what you're missing is that early period from the 1970s where things were pretty awful, particularly that 73-74 period. What that means is just about all of the performance metrics will be skewed if you start on a date like 1978, 1979, or 1980. To really see this, the easiest thing to do would be to go take your portfolios you've got there and take out the long-term treasury bonds and just put in 10-year treasuries. It's only a 10% allocation, so it shouldn't in theory matter that much. But what will happen then is you'll get all that data back to the 1970s and you'll see your safe withdrawal rates drop by about a percentage point. Because that in fact was one of the worst periods that is the sort of creator or genesis for what the safe withdrawal rate is, that early 1970s period. So I would say there's not that much special about the portfolios that you've come up with here. other than if you don't include the worst data, you get better results. What's also interesting about this is that it shows you that the safe withdrawal rate is really a very safe withdrawal rate because in most circumstances, unless you have the worst of the worst, you can probably take out significantly more out of a portfolio than a safe withdrawal rate would suggest. And that is another reason why we don't need to be taking a safe withdrawal rate that's already conservative and then arbitrarily reducing it further. That really makes no sense. And what happens if you do things like that? First of all, then it doesn't really matter what kind of portfolio you have, because if it's a 3% withdrawal rate or less, you can hold just about anything. And so you're kind of fooling yourself that, what you're actually doing is meaningful.

Mostly Voices [28:09]

Forget about it.

Mostly Uncle Frank [28:12]

If you're gonna be one of those people, you might as well just go take the Vanguard Wellington or Wellesley off the shelf and just use that and forget about whatever else you're doing, because you're kind of just wasting your time. Your real strategy is don't spend money. It has nothing to do with what your portfolio is. The other thing that these artificially low safe withdrawal rates do is make Other products look more attractive, artificially more attractive. So annuities look more attractive and bond ladders look more attractive. They're not actually more attractive. They just look more attractive because you've skewed the analysis of the portfolio. This is actually a trick that is commonly played by annuity salesmen and people like that. Tell me, have you ever heard of single premium life? Because I think that really could be the ticket for you. One of the ways they do that, for example, would be to take the stock market's returns starting in 1999. Now we talked about how the period from 1996 to 1999 was a bang-up blowout period due to the dot-com bubble. The period immediately after that was one of the worst ones in our lifetime, at least for the broad-based stock market or anything in the growth category. And so if you compare that period to some fixed annuity product, all of a sudden the annuity product looks much better just because you are using a particularly bad period for the stock market.

Mostly Voices [29:45]

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

Mostly Uncle Frank [29:52]

This is one of the reasons why what Mark Twain said is quite true that there are lies, damn lies, and then there are statistics. Am I right or am I right? Or am I right? Am I right? I gotta go. So don't take it from an annuity salesman. A guy don't walk on the lot lest he wants to buy. They're sitting out there waiting to give you their money or you're gonna take it. But don't also fool yourself by taking an analysis and then applying some arbitrary thumb on the scale to make your safe withdrawal rate even worse because all you are doing is fooling yourself and telling yourself that you're better off with annuity products or bond ladders than you are with the portfolio, which probably is not true. That's not how it works. That's not how any of this works. Anyway, I think I've gone a little bit off tangent. Practically a mini rant there. And his name is John C. I do hope I answered your question before that, and thank you for your email. Bow to your sensei.

Mostly Voices [31:05]

Bow to your sensei.

Mostly Uncle Frank [31:09]

But now I see our signal is beginning to fade. Just one announcement before I go. which is that I realize it is charitable giving season, at least for those looking for a tax deduction at the end of the year. I would invite you to donate to our charity here, the Father McKenna Center, and I will link to that again in the show notes. One of my listeners also sent to me a link to the Charity Navigator site, which rates charities on their effectiveness, and the Father McKenna Center has a 96 out of 100 rating on it. So you're getting bang for your charitable buck there. It's got four stars. The best Jerry, the best. But we do try to be very transparent and very efficient with the dollars that you so generously donate. And I will also link to that in the show notes. In the meantime, if you have comments or questions for me, please send them to Frank@riskparityradio.com. www.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 or a review. That would be great. Mmmkay? 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 [32:50]

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.