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.

Mostly Mary [0:18]

A different drummer. 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, along with a host

Mostly Uncle Frank [1:32]

named after a hot dog.

Mostly Voices [1:35]

Lighten up, Francis.

Mostly Uncle Frank [1:37]

But now, onward, episode 307. Today on Risk Parity Radio, it's time for our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com. On the portfolio's page. Boring.

Mostly Voices [1:57]

But before I put you to sleep with that, I'm intrigued by this, how you say, emails.

Mostly Uncle Frank [2:05]

And? First off, first off, we have an email from Keith. I can't believe it.

Mostly Mary [2:13]

Do you realize people are actually stopping me on the street for my autograph? Face it, Keith. You're the biggest thing that's happened in this town since they dedicated the new gas station. And Keith writes, Hey Frank, I've become a loyal listener and have recently completed listening to your backlog of episodes. Whoa. You are talking about the nonsensical ravings of a lunatic mind. Thank you for sharing what you've learned with the world of do-it-yourself investors. You truly are making a difference in people's lives. Kudos to you and Mary. Yeah, baby, yeah! I've got three questions. One, as it's been 30 years since the foundational Fama French paper was written, has the outperformance of small cap value been looked at recently to confirm the conclusions still hold with this additional large chunk of data accumulated since then? Two, when making major changes to portfolio allocations, like going from a portfolio of individual stocks or 100% equity ETFs to a golden ratio portfolio, Is it better to do it all at once or spaced over time? What's the best way to handle required minimum distributions, RMDs, in a traditional IRA? Whatever you keep in there, you're forced to sell a significant portion each year for the RMD, around 10% in my parents' case. What is the best way to handle this in the context of rebalancing each year? Allocating all of the treasuries to the IRA to keep the equities and long-term gains in the taxable account Puts you in a situation where the treasuries get sold in the IRA and you don't have cash in there to bring that allocation back up. By the way, I made a contribution to the Father McKenna Center. Happy to help a cause you are clearly passionate about. Top drawer.

Mostly Voices [4:03]

Really top drawer.

Mostly Mary [4:07]

Also, happy to see the Center's score on the Charity Navigator site might be worth noting for your listeners. The best, Jerry. The best.

Mostly Voices [4:15]

Well, first off, let me apologize for not seeing your email

Mostly Uncle Frank [4:19]

earlier this week, because since you are a donor to the Father McKenna Center, I should have moved you to the front of the line. But hopefully I can make amends for that now. For those of you who don't know, all five of you, this podcast has no sponsors, but we do support a charity, the Father McKenna Center. and you can donate to that either through our support page and become a patron on Patreon, or you can go and do it directly at the Father McKenna website. But if you do donate to the Father McKenna Center, you do get to go to the front of the email line. Yes! And I thank you very much for your support. And you were the one that noted that the center has a very high score on the Charity Navigator site, which I will link to again. Now getting to your questions. Fama French factors. Yes, this is the subject of just ongoing debate amongst all of the Cliff Asnesses and other people in the world that investigate factor type investing. There's an interesting article I've run across from, I think, Alpha Architect, which seems to suggest that it's really the value factor that is more important than the size factor. Others have said, well, what you really want to do is combine value with momentum or some other thing. And what they're really debating here is whether certain combinations of factors will lead to an outperformance as against the overall market. From my perspective, I am less concerned about that. I would rather just assume that all parts of the market are likely to yield similar returns to the market, and that the real reason we are combining these things is for their diversification properties, in that we know that one set of style factors is going to perform differently in different kinds of markets and in different years, which will give us rebalancing opportunities over time, and also reduce the overall volatility of the portfolio. so I don't get too hung up about this. I do believe and recognize that small cap growth is probably not something you want or need in a portfolio. And just by eliminating that or reducing your exposure to that combination of factors, you'll probably have better outcomes overall. So I don't think the overall landscape has really changed in the last 30 years. It's just become a little bit more nuanced and complex. Now question two, when making major changes to a portfolio allocations, is it better to do it all at once or space over time? I think that is largely up to personal preference and that there is no way of saying that one is necessarily better than the other. A lot of this has to do with how your accounts are organized and your tax situation. Sometimes it's easier and better simply to start accumulating in an asset you don't have so that you don't have to sell as much in a taxable account, for example. But here's the general principle. The general idea here is that a portfolio for accumulation is really not designed for drawing down on, it's designed for maximizing returns over time, whereas in a drawdown portfolio you are trying to maximize the safe withdrawal rate so you care more about the volatility and the diversification in your portfolio than you do in an accumulation portfolio. So the question comes down to, well, how much do you need to accumulate? And that old estimate using the 4% rule of 25 times your uncovered expenses is still a useful estimate of how much you need. So what that tells you, if you can calculate that then, is you can evaluate, well, how close am I to reaching that number for financial independence for me? And then backing away from that, if you reach that number before you retire, you can simply just turn the switch, go to your retirement style portfolio and kind of cruise in on the rest of the gains. If you are getting close, say five years out, you may want a more graduated shift. And the other criteria which you've mentioned here is that ideally you are making a shift in your portfolio when your current portfolio is at or near an all-time high because that tells you that you are essentially selling high for where you're at. and that's really the danger of holding an accumulation portfolio for too long or getting too close to retirement that you could get that 2008 two years before retirement or that 2000-2003 period, which obviously you need and want to avoid in an accumulation portfolio because if that happens to you, you may not be able to retire on time and may have to wait until the portfolio recovers before you can. As you can see, there's more art than science here. But I would say that once you get to half of your fine number in your accumulated assets, then you should start thinking about this because if you are in a 100% equity portfolio or close to it, that is probably going to double in another seven to eight years. And knowing that, you know that the time period it's compressed. and that may be a time to start moving things. We did things a bit gradually, partially because I wasn't sure exactly what allocation we wanted to have, but really we began the process in about 2013. We're in our retirement configuration by 2017 or 2018, which allowed us then to kind of cruise in. And if you set yourself up like that, you can basically then pull the plug on your regular employment at any time. I know that some people, including Tyler at Portfolio Charts, are conservative and would rather just accumulate in their retirement style portfolio. That will take longer, but it is also a viable option if you have no plans to retire anytime soon anyway. Alright, moving to your third question. What's the best way to handle required minimum distributions in a traditional IRAs. Well, there are several ideas here. The first one is to approach this with that in mind long before you get to your RMDs. And if you do that and are decumulating out of those IRAs or converting them to Roths before you get to RMD age, you just may not have much of an issue by the time you get to RMD age and be able to just take the RMDs and spend them or do whatever with them. Because if that RMD is well below what you're withdrawing anyway, it's kind of no big deal. And most people who have planned well will have some kind of gap between when they stop working and when they're taking Social Security. And it's in that gap that you can best use to do Roth conversions. there while minimizing your taxes. Taxes in retirement really should be thought of over the entire period of your retirement and not just being fixated on the one or two years in front of you. And that's the problem some people get into because they don't take advantage of when their tax rates are really low and then they get hit by an RMD bomb seven, eight years later. Another useful device for dealing with RMDs is to use qualified charitable distributions or QCDs. If you are giving money to charity anyway, this is a way to fulfill your RMD requirements without actually counting as any income. So it's extremely advantageous both to you and the charity. Now you can only start doing those these days when you hit age 70, but that is one of our plans is when we get to age 70 to be making our charitable distributions out of our traditional IRAs to take advantage of this provision in the tax law. Finally, you can also use some of your IRA money to fund what is called a QLAC, which is an annuity, a deferred annuity that starts later. and you can start it as late as, say, 85 years old. I've not looked into all the parameters of that because it wouldn't be something we would be doing for another 15 years or so. By then the law may have changed again. But it does seem like a good way to preserve some money for long-term care, wherever you might need when you get up to age 85. My own parents are 94 and 90 and still live unassisted. So I am thinking annuity products may be something that I really do want in our future, as we are likely to outlive our expected actuarial death dates. Your mileage may vary.

Mostly Voices [13:50]

You need somebody watching your back at all times.

Mostly Uncle Frank [13:53]

Now you also asked about this in the context of rebalancing. That is also going to depend highly on how your accounts are structured and how much of them are in the traditional IRA because it just may not be an issue. But you may have a situation where you need to be taking the RMD and then buying some other asset in some other account to rebalance your overall portfolio to where you want it. I think you're just going to have to approach that on a case-by-case basis and do the math you need to do to make it work. Hopefully all of that helps. And thank you for your email.

Mostly Voices [14:31]

You're not going to amount to jack squat. You're gonna end up eating a steady diet of government cheese and living in a van down by the river. Second off.

Mostly Uncle Frank [14:47]

Second off, we have an email from Pete.

Mostly Voices [14:51]

I got a little rabbit in this hole, and I'm gonna catch the little rabbit and eat him up.

Mostly Mary [15:02]

And Pete writes, Frank and Mary, I'd like to ask for a little help in deciphering this research paper by Scott Cederberg discussed on the Rational Reminder podcast, episode 281. His overall premise is that a portfolio with a 50/50 allocation to domestic and international equities outperforms a lifecycle fund diversified with bonds during accumulation as well as decumulation phases of an investor's life based on the 4% rule, resulting in a greater retirement consumption and bequests, if that's your thing. Greater appreciation during accumulation? Check. That makes sense. 100% equity should outperform any portfolio with fixed income. But greater capital preservation in retirement with a 16.9% chance of ruin for a target date fund versus only an 8.2% chance for a mixed domestic international equity portfolio with no fixed income? That defies logic. Granted, a TDF has problems and is less than ideal as well as limited to only two assets that shift based on age, but I would think it should function better than an all equity portfolio to sustain withdrawals. The other head scratcher is that Mr. Cedarberg states that a 100% domestic equity portfolio would have a 17.4% chance of ruin. This would fit with what I expect, making it riskier than a diversified portfolio in retirement. The implication, though, is that adding 50% international equities contains some sort of secret sauce. I feel like the answer lies in the last paragraph of page four, where he talks about his simulation methodology. But I'm struggling to understand the so what? Can you help? Thanks again for all you do. De Oppresso Liber, Pete.

Mostly Voices [16:58]

By the way, how many lumps do you want? Oh, better give me a lot of lumps. A whole lot of lumps. All right, this is the paper we actually talked about in the last episode.

Mostly Uncle Frank [17:09]

And it's based on another paper we talked about in episode 251 using the same database. As luck would have it, Scott Sederberg also appeared on the Rational Reminder podcast just this past week around the time I released the last episode. And so there was more explication of what he was doing there and the analysis that he came up with. Now what you are referring to about the last paragraph of page four of his paper, that's where he's discussing his bootstrapping methodologies that he incorporated into the Monte Carlo simulations that he was doing. And we did discuss that in the last episode, so I would direct you back there. But it's basically the question of how exactly you are scrambling the data and whether you were using months or years or some other groupings of each individual data packet before you scramble them around in your Monte Carlo simulation. Now again, while I tend to agree with his overall conclusions of this paper because I think comparing a lifestyle arrangement or target date fund kind of setup with a straight allocation, you're going to get similar results whether you use his database or another database. Now in the Rational Reminder podcast where they discuss this, they do get into some of the issues with the way he's constructed his database, which is the real problem here and why Frank Vasquez：His results look so weird. One of the problems that they recognize is that there are currency conversion issues whenever you're talking about investing in international markets. But the bigger problem that they still have not gotten at in these rational reminder interviews of Cedarberg is the problem with the bonds that are in these portfolios. because he's basically using large swaths of what you would term international bonds. And it's one thing to talk about investing in equities in another currency where you just have the currency fluctuation. It's a completely different animal to be talking about investing in the bonds in a market in a bad or weak currency, which is a speculative endeavor and is not something anyone would rationally do. That in my mind is why his bond returns look so bad. What he should be doing and what would be more interesting is that he if he assumed that the bond component was only invested in reserve currencies and in bond markets in reserve currencies, because I think his results would be a whole lot different if he made that assumption. And that is a reasonable assumption because Most people, even if they live in Argentina or Turkey or somewhere with a weak currency or a weak bond market, are not going to be investing 40% of their assets into that kind of a market. So the result of this is while his studies are academically interesting, they are not practically very useful, at least not the way he's constructed the thing right now. As others have noted, the other limitation on these portfolios that he's using is just basically a total market or S&P 500 kind of fund and a intermediate treasury bond fund he's talking about. And there's no possibility of using factors or investing in alternatives like gold or anything else. So again, that's a severe limitation on what you can glean out of these studies. And as for these percentages and raw numbers he's thrown out of these things, I don't I think those are useful numbers to be thinking about precisely because of these problems with the way this thing is constructed. But perhaps he'll fix it someday. I mean, it would be very interesting to see if you, instead of using the bonds that he's using, just limit it to say the bonds from Great Britain prior to World War I, a mix of those and US bonds between the two wars, and then US only after World War II, because I think you're likely to get much different results than the ones he's got if you do that. Anyway, that's probably enough musings on that paper for a couple of episodes, and so we will put that to rest. And thank you for your email.

Mostly Voices [21:43]

Are any of you familiar with what's referred to as a Leroy Jenkins? Well, I don't know what that is, but let's make a very long, elaborate plan. All right, so I'll run in first and use an intimidating shout. When my shout's done, I'll need Joe to come in and use his shout, too. What do you think, Joe? Can you give me a number crunch real quick? Yeah, give me a sec. I'm coming up with 32.33, repeating, of course. Okay, that's a lot better than we usually do. So let's Lee-ron-Drake-En! Oh my God, he just ran in. Let's go. Stick to the plan. Let's go, let's go! Aw, man. Aw, we're dying. Damn it, Cleveland. Where'd they get dragons? These guys have magic, guys. Can't move. Oh, God. You know, Cleveland, you're an idiot. Last off. Last off, an email from Tim.

Mostly Uncle Frank [22:34]

Some call him Tim. What manner of man are you that can summon up fire without flint or tinder?

Mostly Voices [22:45]

I am an enchanter. By what name are you known? There are some who call me Tim. And Tim writes.

Mostly Mary [23:01]

Hi Frank, just started listening to your podcast and it is just perfect as I have been searching for options in portfolio construction.

Mostly Voices [23:13]

Never go in against a Sicilian when death is on the line.

Mostly Mary [23:16]

I am Australian and was wondering if you have ever designed your portfolios and a website to encompass stocks and bonds, et cetera, that an Australian investor could easily purchase in their market. I am in the wealth accumulation phase and am looking at retiring in 10 years. Would you recommend a stock portfolio or maybe a variation on the golden butterfly as the economy doesn't look so promising at the moment? Thanks so much. Well, Tim.

Mostly Voices [23:51]

Greetings, Tim, the enchanter.

Mostly Uncle Frank [23:55]

No, I'm afraid I have not attempted to create an Australian version of anything that I've done. I don't think I'd like another job. Basically, because I'm retired and I'm too lazy to do something like that.

Mostly Voices [24:10]

It's not that I'm lazy. It's that I just don't care.

Mostly Uncle Frank [24:14]

I do wish we would have names like Super A for our retirement accounts instead of pedestrian monikers like 401k that we end up with over here. Super A sounds Much more desirable.

Mostly Voices [24:30]

Au contraire. Don't be saucy with me, Bernaise.

Mostly Uncle Frank [24:34]

Now, I am assuming, like investors in Europe, that you would have some access to some kind of fund that invests either in the whole world markets or US markets, similar to a Vanguard Total Market or S&P 500 fund for that portion of it. The issue you're going to have in a country like Australia is that your particular stock market is very much sector tilted towards the kinds of industries that are in Australia, which includes a lot of mining. It's very similar to Canada. You wouldn't last five minutes, love. This is man's country out here. And so you do want to be investing in global markets, particularly capturing the US large cap techs. that you're not going to find in other countries. Ooh, how convenient. And as for what you should be invested in, this kind of goes back to the earlier question. It kind of depends on how close you are to reaching your financial independence number in terms of accumulated assets. If you're far away, you probably want to stick with 100% stock portfolio. But if you're getting close, then you may want to convert to what you plan to hold in retirement, whether that's going to be the golden butterfly or something else. Just looking at a couple of websites, I found one called Canstar from Australia, and it does indicate that a lot of ETFs are available through the Australian markets, and these ETFs invest in US stocks, other foreign stocks, and all manner of other things. So I would be looking to see what's on your list and find things that seem comparable to the ones in a golden butterfly portfolio or other portfolio, if that's what you're interested in. As for trying to market time by picking a portfolio based on the current economy, that is not something I would do. You have a gambling problem. I would pick your portfolio based on where you are in your personal journey, whether you are early accumulation, late accumulation, or actually getting to the retirement or decumulation phase of that. And that's really the basis for deciding what portfolio is the right kind of portfolio for you, which is separate and apart from any market considerations. Well, you have a gambling problem. If you do come up with a portfolio construction that you'd like to run by, please go ahead and send it back to me in an email and we can look at it on a future episode. I think other people might be interested in what goes on down under. Have you ever protested anything? Sure, every dogma gets run out of the pub. And hopefully that helps and thank you for your email.

Mostly Voices [27:33]

Where could we find this cave, O Tim? Follow. But follow only if ye be men of valor, for the entrance to this cave is guarded by a creature so foul, so cruel, that no man yet has fought with it and lived. Bones of full fifty men lie strewn about its lair. So brave knights, if you do Doubt your courage, or your strength come no further, for death awaits you all with nasty, big, pointy teeth.

Mostly Uncle Frank [28:15]

What an eccentric performance. Now we're going to do something extremely fun. And the extremely fun thing we get to do now is our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the portfolio's page. And not really much happened this week. I guess people were more interested in their holidays than in making big moves in the markets. That's a fact, Jack! That's a fact, Jack! But anyway, looking at those markets, the S&P 500 was up 0.75% for the week. The NASDAQ was up 1.21% for the week. Small cap value represented by the fund VIOV was up 1.28% for the week. I could have used a little more cowbell.

Mostly Voices [29:09]

Gold was also up. I love gold. Gold was a big winner last week. It was up 1.

Mostly Uncle Frank [29:19]

53% for the week and is near its all-time highs. Long-term treasury bonds represented by the fund VGLT Took a breather and were down 0.66% for the week. REITs represented by the fund REET were up, they were up 0.63% for the week. Commodities were the big loser last week. I think the price of oil keeps falling. The representative fund, PDBC was down 3.8% for the week. Preferred shares represented by the fund PFF were down 0.58% for the week. And managed futures represented by the fund DBMF were up 0.60% for the week. Moving to these portfolios, first one is this All Seasons Portfolio. It's a reference portfolio. It is only 30% in stocks in the Total Stock Market Fund. It's got 55% in Treasury bonds, intermediate and long term, and 15% in gold and commodities. It was up 0.06% for the week, so it barely moved. It's up 10. 15% year to date and up 1.28% since inception in July 2020. Now moving to these bread and butter portfolios that somebody might actually use in a retirement or decumulation scenario. First one is the Golden Butterfly. This one's 40% in stocks divided into Total stock market fund and a small cap value fund, 40% in treasury bonds divided into long and short, and 20% in gold. It was up 0.71% for the week. It's up 12.13% year to date and up 20.25% since inception in July 2020. Next one's the golden ratio. This one is 42% in stocks and three funds, 26% in a long-term treasury bond fund, 16% in gold, 10% in a REIT fund, and 6% in a money market fund. It was up 0.37% for the week. It's up 13.71% year to date and up 16.57% since inception in July 2020. Moving to the Risk Parity Ultimate, which is kind of our kitchen sink portfolio. I'm not going to go through all 15 of these funds, but it was up 0.53% for the week. It's up 12.51% year to date and up 6.4% since inception in July 2020. Now moving to our experimental portfolios involving leveraged funds. It's impossible. Tony Stark was able to build this in a cave with a bunch of scraps. They actually didn't move very much this week. They're usually a lot more volatile. First one is this accelerated permanent portfolio. It's 27.5% in a leveraged bond fund, TMF, 25% in a leveraged stock fund, UPRO, 25% in a preferred shares fund, PFF, and 22.5% in gold, GLDM. It was up 0.14% for the week. It's up 19.49% year to date, but down 8.92% since inception in July 2020. Next one's the aggressive 5050. This is our least diversified and most levered of these portfolios. It's one third in a levered stock fund, UPRO, one third in a levered bond fund, TMF, and the remaining third in ballast in preferred shares and in intermediate treasury bond fund. It was down 0.09% for the week, so barely moved. It's up 17.61% year to date, but down 18.52% since inception in July 2020. You can see how this one is more volatile and has some issues compared to the Accelerated Permanent Portfolio. And part of that is it does not have any alternative assets in it. It's just straight stocks and bonds. A bunch of scraps!

Mostly Voices [33:23]

But I wanted to have something like that for comparison purposes

Mostly Uncle Frank [33:27]

in this set of portfolios. And our last one is a levered golden ratio. This one is 35% in a levered composite fund, NTSX. That is the S&P 500 in treasury bonds, 25% in gold, GLDM, 15% in a REIT, O, 10% each in a small cap fund, TNA, it's a levered fund, and a levered bond fund, TMF, 10% in there. And the remaining 5% is in a managed futures fund, KMLM. It was a big winner of these portfolios this week. It was up 0.88% for the week. It's up 12.72% year to date, down 13.7% since inception in July 2021. It started at a much more inauspicious time than the other ones, Now, we had talked at the beginning of 2023 of making a transition in this portfolio in the golden ratio portfolio to add some managed futures. But we didn't want to do it at that time because the managed futures had been greatly outperforming everything else. And we are going to substitute REITs out of these and put the managed futures in. We are getting to the point though now where managed futures have had a bad year, a mediocre year really, whereas the REITs have recovered significantly. So we may get to that crossing point in the new year where it makes sense to make those swaps. If current trends continue, we'll probably see that happen next month or perhaps in February. But I will keep you posted.

Mostly Voices [35:16]

Fine, but the bacon man lives in a bacon house. Now he doesn't.

Mostly Uncle Frank [35:20]

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 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 subscriber and like, subscribe, give me a follow, a review, some stars. That would be great. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Voices [36:03]

We are gathered here in the sight of the The spirits of Christmas, present, past, and future to baptize this new baby toy. Rudolph, do you believe in Christmas? I do. Rudolph, do you renounce the Grinch? I do renounce him. Do you renounce all the Grinch's works? I do renounce them. Then I baptize this baby toy in the name of Christmas. They say you butchered them, killed them all. Rudolph, is it true? This one time, Clarice, I'll let you ask about my affairs. Is it true? Are you a murderer? No. I'm gonna get a drink.

Mostly Mary [37:33]

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.