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. Thank you, Mary, and welcome to Risk Parity Radio.

Mostly Uncle Frank [0:45]

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 [1:32]

Along with a host named after a hot dog.

Mostly Voices [1:35]

Lighten up, Francis.

Mostly Uncle Frank [1:39]

But now onward to episode 313. 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 portfolios page. Boring. And yes, there isn't really much to say about that. They all went up a little bit. Prove it, baby.

Mostly Voices [2:04]

But before we get to that, I'm intrigued by this. How you say? Emails. And? First off.

Mostly Uncle Frank [2:14]

First off, we have an email from Mr. Klingon.

Mostly Voices [2:20]

Klingons called you a tin plated, overbearing, swaggering dictator with delusions of godhood. And Mr. Klingon writes.

Mostly Mary [2:32]

Hi Frank, thanks for reading my question about the small cap funds. Would you be okay in using a small cap blend fund paired with a total market fund in an accumulation portfolio instead of using leverage? I don't like using leverage, and I've read a lot about how small caps can boost returns and volatility.

Mostly Uncle Frank [3:12]

So I'm using an 80% total market ITOT and 20% small cap blend IJR in my accumulation portfolio, and I'd begin a transition to a 60% ITOT, 10% VIoV, 20% 10-year Treasury, and 10% gold in a decumulation portfolio five years before I pull the plug. What do you think about my plan? Well, I don't think you need to use leverage in an accumulation portfolio. I've given her an Oshie's God, Captain.

Mostly Voices [3:24]

If I push it any harder, the whole thing will blow.

Mostly Uncle Frank [3:29]

I know we talk about such things and experiment with such things, but for most people just having 100% equity portfolio to start with and for some period of time while they're accumulating would be sufficient. And if you want to go back to my Wizard of Oz episode, number 208, you can hear about my recommendations for beginning investors. So you are proposing using a 100% equity portfolio that's 80% total market in the form of ITOT and 20% small cap blend in the form of IJR for an accumulation portfolio. And honestly, that could work just fine because remember the macro allocation principle and what it says.

Mostly Voices [4:14]

Remember thou art mortal. Remember thou art mortal. Remember thou art mortal.

Mostly Uncle Frank [4:23]

That principle comes from chapters 18 and 19 of Jack Bogle's Common Sense Investing. And it is about an analysis showing that if you look at hundreds of managed portfolios, the defining characteristic of them is that all the ones with the same macro allocations tended to perform about the same over time. And so whether you had a hundred percent ITOT portfolio or something with some small cap in it probably isn't going to make a huge difference. And over any given decade, it is pretty much a random event as to whether that 20% in small cap blend will outperform in that time period. It is true, however, that small cap value added to a portfolio, at least historically, has shown to improve the long-term performance of such a portfolio. The problem being is that those outperformances do not occur on a regular basis. And so you cannot know, for example, whether the next decade will show an outperformance from small cap value or not. Certainly the last decade did not show that outperformance. The decade before that did show that outperformance.

Mostly Voices [5:43]

That was weird, wild stuff.

Mostly Uncle Frank [5:46]

I would be more surprised if small cap blend really made a big difference in one of these kind of portfolios simply because historically we know that small cap growth is the worst combination, if you will, if you're looking at the risk versus reward spectrum of things. But I'm honestly not averse to using any combination of these things so long as you're using low cost funds and that you are sticking with whatever you picked. and then rebalancing it as you go along. Because actually where people have the most problems is they start with one allocation of stuff and then three years later they look at it and say, oh, but I think I'd be better off with this one over here. And so they end up jumping from fund or factor or sector from one to another. And that is actually where people end up underperforming. because they end up chasing what has performed well recently, and that is shown to yield underperformance if you keep doing that.

Mostly Voices [6:50]

Forget about it.

Mostly Uncle Frank [6:54]

So the most important thing is to come up with a reasonable allocation here, and I think 80% ITAD and 20% small cap blend is a reasonable allocation, but then stick with that regardless of what may happen in the next 10 years. And that's really the hard part, I think. If you're wondering what my own preference is and what I tell my children is that you're best off with a large cap growth, which could also be a total market or an S&P 500, those are close enough. Half of that and half in small cap value. That is what I would do if I were starting out again today in accumulation. Now, whether that will be the best choice in the next 10 or 20 years, I really don't know. We don't know.

Mostly Voices [7:41]

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

Mostly Uncle Frank [7:45]

I think it'll be the best choice in 30 years. I'm just not sure most people can wait that long. All right, you also asked about transitioning to a portfolio that's 60% total market, 10% small cap value, 20% 10-year Treasuries and 10% gold five years before you pull the plug. I would revisit that mostly because I don't think you really want 60% in the Total Market Fund. I think you want half of your stock allocation, at least half of it, in value-oriented things, whether those are small-cap value or something else on the value spectrum. I do think you really do want half of your stock allocation in what you would traditionally call a value category. The rest of it is probably something you can work with. I probably would have a preference though for also splitting instead of doing 20% in 10-year treasuries, actually doing 10% in long-term treasuries and 10% in short-term treasuries because that will give you more flexibility and more rebalancing opportunities while overall giving you the same kind of performance, if you will. And that's the idea behind the bond allocation in the Golden Butterfly Portfolio to split between those two things. Because I also think you're probably going to want at least some allocation to short-term bonds or cash anyway, but maybe you have that outside of what you're proposing here. You do have to spend some money, and it's usually easiest to spend it if it's in that form. even if you're only keeping 4% or 5% for the next year. I would also make sure that you actually go and run your proposed portfolios in the various calculators, Portfolio Visualizer, Portfolio Charts, and download that toolbox from Early Retirement Now because you can model this portfolio there as well going back 100 years. I think that'll give you more confidence a little more confidence in what you're doing, but also you can experiment with what I just suggested about having more value in the portfolio, because I think that's going to ultimately give you a higher projected safe withdrawal rate. Assuming that's what you're looking for. I think that really could be the ticket for you. But hopefully that helps, and thank you for your email.

Mostly Voices [10:12]

And that's when you hit the Klingon. Yes, sir. Second off.

Mostly Uncle Frank [10:25]

Second off, we have an email from Bob.

Mostly Voices [10:29]

The thing is, Bob, it's not that I'm lazy. It's that I just don't care. And Bob writes.

Mostly Mary [10:36]

Hi, Frank. Happy New Year. I've been following your threads on Facebook, and you have provided some very insightful comments which I appreciate. Thank you. I'm planning to retire in two years and am currently realigning our portfolio since I've got a bit too aggressive at an 80/20 allocation mix. You had mentioned the Monte Carlo investment model. Fidelity is our brokerage group of choice for over 30 years. Do you have any insight or opinion on their retirement planning tool? I believe they also employ the Monte Carlo model. Thanks, Frank. Bob.

Mostly Voices [11:11]

Here's something else, Bob. I have eight different bosses right now. I beg your pardon? Eight bosses. Eight, Bob. So that means that when I make a mistake, I have eight different people coming by to tell me about it. That's my only real motivation is not to be hassled. Well, Happy New Year to you too, Bob.

Mostly Uncle Frank [11:31]

You can see I'm still cleaning up here around with emails from December. I think I'll be done with those today or shortly thereafter. I have the memo. All right, you say you were a couple years from retirement, currently have an 80/20 allocation mix, and you're thinking of moving to something more conservative. That is probably a good idea if you plan on spending your money. An 80/20 portfolio or something that is more aggressive than that is really more aligned with preserving money to leave to somebody else because it's still in a growth kind of configuration. And if you're going to leave the money to somebody else, you want to invest that money as if you were that person right now. And so having an 80/20 or a 90/10 or a 100% stock portfolio would be appropriate for somebody who really wanted to do that and was not actually planning on spending their money. But if you want to be spending your money at a decent clip in that 4% to 5% range, let's just say, yes, you do need a more conservative portfolio. And usually those portfolios have between 40% and 70% in stocks in them and then have the rest of the assets allocated to bonds and other things. Every good financial advisor will also tell you not to hold too much cash. Too much cash is usually more than 10% unless you have some special need for it or allocation for it. Now, everybody's situation is going to be different, so your mileage may vary. So you may have needs for other things. For example, if you were quitting in two years, but your Social Security was not starting for another four years, I could see using a four year bond ladder to fill in that gap until you start taking your Social Security. That's just an example of a variation on a theme. What we really talk about here mostly is just pretending that all you're doing is constructing a portfolio and then spending money out of it. Because that applies to just about everybody in some way, shape, or form. Now, investment models and Monte Carlo simulations. Just for the nomenclature, What a Monte Carlo is is called a simulation because it's not really modeling one thing per se. You take your model and put it into the Monte Carlo calculator or simulator to see how that particular model performs with a given data set. I have to confess, I haven't played around with Fidelity's tools recently. When I did play around them with before, I didn't really like them because there was a lot of black boxy kind of stuff going on there. I wasn't sure what kind of data they were using or what kind of assumptions they were putting in for anything. And without knowing those things, you really don't get a sense of confidence that this is something that is telling me something valuable about my portfolio or my projections. So I would prefer to use a tool like the one at Portfolio Visualizer. which has a nice Monte Carlo simulator, has a nice big data set, you can look at it and see where the data comes from if you go to the data sources tab and look it up. And so there aren't any questions about what you're really doing there. And you can also modify it for the number of years or do it by asset class or do it by specific fund, change different parameters about adding or taking money out at different times. there are a lot of different parameters you can adjust in there. And I think it's a really good tool, particularly since it's free. So that is the one I would probably go to. That doesn't mean you should not also use the Fidelity Calculator, because what it would be nice to see is if you get similar results both at that calculator and the one at Portfolio Visualizer. Because if you use multiple calculators and get similar results, then you have even more confidence in what you're doing. and I am a big proponent of using multiple calculators for all of these sorts of things. I also think it's very important to segment out your planning to distinguish things that are predictable or known from things that are not very predictable or not really known or can't be known exactly. And what I mean by that is you know what your expenses are. You can calculate those. You can look up what your they are right now and make some reasonable projections as to what they'll be in the future because they're probably not going to change all that much, at least in the near term. You also know things like, well, how much is my Social Security going to be? Whether you have pensions and a lot of other things like that. And I think you need to make all of those calculations almost separately from any projecting you're doing using Monte Carlo simulators or anything else, because that's the uncertain part of this analysis. So if you do the more certain part of the analysis, you should be able to get out of that basically a number, a net number that needs to be covered by your assets, and then just focus on that as the uncertain or projection part of what you're doing. And I think you get a much better feel or picture of what's going on there if you do it that way than just try to stick everything into one of these black box calculators, which puts out something and you're not sure why or where it's coming from. Now when you do a Monte Carlo simulation at Portfolio Visualizer or anything else, what you're going to get out of it is a projection of possibilities. Basically it's going to scramble up all the data you put into it And then look at what would happen under 10,000 different scenarios is usually the number they use. Then it orders them from worst to best, if you will. And they usually say, this is the 10th percentile. This is the 20th percentile. 30, 40, 50, 60, 70, 80, 90, 100. And what you'll find is that in that 0 to 10th percentile, that is stuff that is so pessimistic that it's never occurred and never likely to occur. on the other side between 90 and 100 that is so aggressive and optimistic that has never occurred and never likely to occur. So what you're most interested in is what's in the middle of that projection. And it will give you something that's called success rates that align with these projections and these percentiles. So we'll say something like, well, if you did it this way, this would have succeeded. 90% of the time under our simulation or 80% of the time or 95% of the time. All that is showing you is not the probability of success or failure absolutely. What it's showing is the probability that you would have to change your plans somewhere along the way. So when they say a success rate, it's not really a success rate. It's a probability of having to do something different because it's not working. and usually that's something different is cutting back on your spending. Now for all of these things, the most important thing to do is to compare one portfolio against another one using the same data set and same analysis and do that with several calculators because that's really what you're coming down to is not so much the absolute numbers that you're getting out of it, but using it as a tool to decide, well, this portfolio is likely to be better than that one. so as an example of that, I did a couple of runs for you at portfolio visualizer using the Monte Carlo simulator, taking a million dollar portfolio, we're taking out four and a half percent annually, and we use data since 1987. And so I ran a portfolio that's in standard kind of 80 20 portfolio against one that is much more Diversified, 55 in stocks divided into large cap growth and small cap value, 25% in long-term treasury bonds, 5% in short-term treasury bonds, and 15% in gold. And that analysis over a 40-year time frame shows a failure rate or a success rate for the 80/20 portfolio about 88%, and for the more diversified portfolio at 93%. And so that's really what you want to be thinking about whenever you're analyzing these sorts of things. Because the other truth about all of this is that if your withdrawal rate is low enough, say under 3%, you could hold just about anything that has 30% in stocks or more. It's only when you want to be taking out 4% or 5% out of a portfolio over a long period of time that these constructions start making the most difference. Because the more you're trying to withdraw, the more it matters what's in that portfolio to begin with. That's the fact, Jack!

Mostly Voices [20:47]

That's the fact, Jack!

Mostly Uncle Frank [20:51]

So you can check those two links out and then begin to play around with that yourself and hopefully that will steer you in the right direction as to how to think about these things as you go into retirement.

Mostly Voices [21:04]

You were saying something, little boy?

Mostly Uncle Frank [21:07]

Congratulations on that.

Mostly Voices [21:12]

Well, you haven't got the knack of being idly rich. You see, you should do like me, just snooze and dream. Dream and snooze, the pleasures are unlimited.

Mostly Uncle Frank [21:20]

Hopefully that helps and thank you for your email.

Mostly Voices [21:23]

Looks like you've been missing a lot of work lately.

Mostly Uncle Frank [21:27]

I wouldn't say I've been missing it, Bob. Good one.

Mostly Voices [21:31]

Oh, that's terrific, Peter. Next off, we have a quick email from my contact info.

Mostly Uncle Frank [21:38]

Oh, I didn't know you were doing one. Oh, sure. And my contact info writes：Doctor who? Fantastic. Happy holidays.

Mostly Voices [21:50]

Well, Doctor who is kind of fantastic.

Mostly Uncle Frank [22:18]

At least the old Doctor who. I honestly have not watched the more recent versions of this, but I do remember it from around the 1970s. And that cool theme music. But enough clowning around and thank you for that email.

Mostly Voices [23:57]

Last off. Last off, an email from Ralph. Compassionate, tough, curious. These are all words Ralph Wiggum doesn't know. But he doesn't need to know them. He lives them every day. And Ralph writes, hi, Frank.

Mostly Mary [24:21]

I was playing with the withdrawal rates tool at Portfolio Charts and was impressed that just a 5% allocation to gold bumped my perpetual withdrawal rate from 3.6% to 4.1% in a 40-year retirement plan. Is it really so powerful? And how much would be the threshold for its maximum power while at the same time not losing growth potential? Would you start allocating to gold only after you start pulling money out of the portfolio or before even? Thanks, Ralph. I'm voting Ralph for president.

Mostly Voices [24:52]

His easy smile makes me think everything is okay, even when I know it ain't. I'm voting for Ralph too, but don't tell you know who.

Mostly Uncle Frank [25:00]

Well, I really do view gold as a diversifier and as something that has pretty much zero correlation to both stocks and bonds. And so I'm really more interested in it for its properties in a drawdown portfolio, because that's where you really care about these safe withdrawal rates and perpetual withdrawal rates in your accumulation. You don't really care that much about the volatility and since you know that stocks and in particular stock index funds are likely to be the best performers over any given time period. You should probably focus more on those. It is true, however, that a 90% stock portfolio performs just about the same as a 100% stock portfolio. So you could fiddle around with that 10%, I suppose, and put 5% in gold in it and 10% in cash or some other bond or something like that, I just can't see that it would necessarily help you in any real way, and that it'd be really worth doing. The problem with something like gold is that it can have a whole bad decade, and it's completely unpredictable. Other than if there's a war that starts somewhere in the world, usually the price of gold goes up. But we can't really predict when that's going to happen either. So if you're going to put any of it in a Accumulation portfolio, I probably would not put very much in it. Five percent would probably be more than enough in my view. And then hopefully you'll have a lucky decade and not an unlucky decade. That's my story and I'm sticking with it. And thank you for your email.

Mostly Voices [26:38]

On November 4th, vote for the latest in a long line of great American leaders. I want a tricycle? In a dog who won't chew my Hot Wheels and a brighter future for America. I'm Ralph Wiggum and I've been a good boy. Make this country great again.

Mostly Uncle Frank [27:01]

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 portfolios page. It was actually a pretty uneventful week with basically some recoveries from the week before. The S&P 500 was up 1.84%. The NASDAQ was up 3.09% for the week. It was a big winner. Small cap value represented by the fund VIoV was actually down last week. It was down 0.87% for the week. Gold was nearly flat. Gold was up 0.04% for the week. Long-term treasury bonds represented by the fund VGIT were up 0.47% for the week. REITs represented by the fund R EET were up 0.83% for the week. Commodities represented by the fund PDBC were down. They were down 0.45% for the week. Preferred shares represented by the fund PFF were up. They were up 1.48% for the week. And managed futures represented by the fund DBMF were also up. They were up 0.85% for the week. And so looking at these sample portfolios, they were all up marginally or slightly. First one is this All Seasons. This is a reference portfolio that is only 30% in stocks. It's got 55% in intermediate and long-term Treasuries and 15% in gold and commodities split between the two. It was up 0.84% for the week. It's down 0.75% year to date. and up 0.78% since inception in July 2020. Now moving to our bread and butter kind of portfolios that are of more interest to actual retirees. The first one is the Golden Butterfly. This one is 40% in stocks divided into total stock market fund and a small cap value fund. 40% in bonds divided into long and short treasuries and 20% in gold. It was up 0.42% for the week. It's down 1.33% year to date but up 18. 92% since inception in July 2020. Next one's Golden Ratio. This one's 42% in stocks and three funds, 26% in long-term treasury bonds, 16% in gold, 10% in a REIT fund, and 6% in a money market fund. It was up 0.85% for the week. It's down 1.05% year to date and up 15.82% since inception in July 2020. Next one's the Risk Parity Ultimate. I won't go through all of these 15 funds. It's also got a little bit of Bitcoin and Ethereum in it, which were very volatile last week but actually didn't end up very much different than they started. But anyway, this one was up 0.99% for the week. It's down 1.1% year to date and up 5.63% since inception in July 2020. And now moving to these experimental portfolios involving leveraged funds. Yes, we do hideous experiments here, so you don't have to. Look away, I'm hideous.

Mostly Voices [30:19]

First one is this Accelerated Permanent Portfolio.

Mostly Uncle Frank [30:22]

This one is 27.5% in a levered bond fund, TMF, 25% in a levered stock fund, UPRO, 25% in PFF, that's a preferred shares fund, and 22.5% in gold. Gldm it was up 1.84% for the week it's down 2.28% year to date and down 10.44% since inception in July 2020. Next one's the aggressive 5050 this was the big winner last week in the levered portfolio sweepstakes. Dr. Twink is going to the front. This one's the most levered and least diversified of these portfolios. It's 33% in a levered stock fund, UPRO, 33% in a levered bond fund, TMF, and the remaining third divided into preferred shares. And intermediate treasury bond fund, VGIT, is up 2.32% for the week. It's down 2.21% year to date, down 19.81% since inception in July 2020. And the last one is the levered golden ratio, This one's the youngest one. It is 35% in a levered composite fund called NTSX. That is the S&P 500 in treasury bonds in a 60/40 configuration. It's got 25% in gold, 15% in a REIT, O, 10% each in a levered bond fund, TMF, and a levered small cap fund, TNA, which has really dragged this portfolio down. since 2021 and 5% in KMLM, which is a managed futures fund. It was up 1.14% for the week. It's down 1.7% year to date and down 14.93% since inception in July 2021. It's noticeable that those small caps are still 20% off the highs they reached in 2021. Unlike the corresponding S&P 500 and large cap companies. But in theory they will catch up at some point. You would say they are quite a value play these days.

Mostly Voices [32:31]

I want you to be nice.

Mostly Uncle Frank [32:35]

But anyway, that concludes our portfolio review for this week. And now I see our signal is beginning to fade. Just one announcement. If you are interested in the Economy Conference, For five people, it's going on in Cincinnati in March 15th through 17th.

Mostly Voices [32:56]

You on the motorcycle. You two girls, tell your friends. Free parking. Free parking. And I will be appearing there on a panel.

Mostly Uncle Frank [33:10]

We're going to be doing a case study of one of the participants The

Mostly Voices [33:14]

Inquisition, wanna show the Inquisition, here we go. A lucky guinea pig, as it were. Hey Torquemada, what do you say? I just got back from the Auto da Fe. Auto da Fe, what's an Auto da Fe? It's what you ought to do, but you do anyway. And there'll be speakers and fun and cake and fun and beer and fun and all that fun. In this fun kind of meeting, not a star chamber session, but this fun meeting with beer and cake and fun and other things like that. It turns out that that one day of pure undiluted autonomy has led to a whole array of fixes for existing software, a whole array of ideas for new products that otherwise had never emerged. One day.

Mostly Uncle Frank [34:02]

Diana tells me she does think it's going to sell out this year.

Mostly Voices [34:05]

Get your hot dogs. Hot dogs. Hot dogs.

Mostly Uncle Frank [34:09]

I will link to it again in the show notes. If you use the code RISKPARITYRADIO you can get 10% off.

Mostly Voices [34:16]

That is the straight stuff, O Funkmaster.

Mostly Uncle Frank [34:19]

That's all I got for you. Bow to your sensei. Bow to your sensei. 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. Mmmkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Voices [35:02]

But I said, I don't care if they lay me off either because I told I told Bill that if they move my desk One more time, then I'm quitting. I'm going to quit. And I told Dom, too, because they've moved my desk four times already this year, and I used to be over by the window, and I could see the squirrels, and they were married, but then they switched from the swing line to the Boston stapler, but I kept my swing line stapler. If they take my stapler, then I'll have to, I'll fit the building on fire.

Mostly Mary [35:33]

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.