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 [1:11]

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

Mostly Uncle Frank [1:15]

There are basically two kinds of people that like to hang out in this little dive bar.

Mostly Voices [1:18]

You see, in this world, there's two kinds of people, my friend.

Mostly Uncle Frank [1:22]

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.

Mostly Voices [1:38]

Abby someone. Abby who? Abby normal. Abby normal.

Mostly Uncle Frank [1:47]

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.

Mostly Voices [2:03]

And they are here to share information and to

Mostly Uncle Frank [2:07]

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. What we do is if we need that extra push over the cliff, you know what we do? Put it up to 11. Exactly. But whomever you are, you are welcome here. I have a feeling we're not in Kansas anymore. But now onward, episode 318. 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. Just a preview of that. Boring. Yes, this was one of the most boring weeks in the markets in a couple of years, probably. I'm putting you to sleep.

Mostly Voices [3:11]

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

Mostly Uncle Frank [3:19]

First off, we have an email from Anderson.

Mostly Voices [3:23]

All the old boys are going to be here this year. Dick, Peter, Rod, Johnson. Well, I haven't heard a rumor that old John Thomas might show up this time.

Mostly Mary [3:34]

And Anderson writes, Uncle Frank, I am probably 20 plus years from retirement. I am hoping to maximize my accumulation portfolio as much as possible. I have been following your show for a long time and have been closely following a lot of your sample portfolios. Also, over the past three years with the ups and downs in the market, I've realized that I think I can handle market volatility from a psychological aspect. You have a gambling problem.

Mostly Voices [4:04]

Currently, my portfolio is a simple S&P 500 fund and

Mostly Mary [4:08]

small cap value. I am considering this move to maximize my accumulation. Large cap growth 30%, small cap value 50%, UPRO 20%. I know this will be volatile, but I think I can stomach it. I know UPRO is a daily leverage, and there is a lot of concern about volatility decay, but several articles and discussions have convinced me that although it won't match three times performance long term, it should outperform over time. My other thought was NT$X instead and possibly a higher allocation. What would be your recommendation to maximize returns in an accumulation portfolio with little to no concern about volatility? Thanks again, Anderson.

Mostly Voices [4:56]

Well, John Thomas, how long's it been? That long? Oh, sure, I got Dick's number.

Mostly Uncle Frank [5:03]

Well, isn't it funny how So many more of these gambling problems appear when markets are near an all-time high. Yeah, that's just a joke. Well, you have a gambling problem. So I always come back here to the academic research on this, and I'll link again to this Ben Felix video about leverage and his observation there and What academics have observed is that there's really only two ways to beat the market. One is to take a concentration in something that you think is going to do better than the market, which has proven to be very difficult to accomplish over long periods of time. It's only a limited number of people can do that consistently. And then the second one is to take leverage on the portfolio. You're gonna end up eating a steady diet of government cheese and living in a van down by the river. And obviously, if the market does well or positively, you will do better than the market because you are effectively multiplying that return. Time is money, boy. And that always begs you the second question, which is, well, assuming you're planning on taking leverage, how would you do that? There are basically two ways of doing that. One is to invest on margin at a place like Interactive Brokers, where you can get at least a reasonable interest rate. and the other one is to use these newly constructed leveraged funds, which have really only been around for about 15 years now. Now, I had another listener run a very interesting analysis trying to compare which one of those ideas was better based on prevailing interest rates. And I don't remember what the exact conclusion was, although at current interest rates, it appears that taking margin to be a very expensive way to do this. When it was 1% or 2% that you could take margin on, it made a whole lot of sense to use that method as opposed to leveraged funds. Now, a leveraged fund like UPRO is charging you about 1% or slightly less than 1% just to operate in addition to its other potential drawbacks having to do with decay, and volatility drag. But as you and many other people have observed, these things do seem to be viable for at least some leverage in portfolios. And if you go over to that website, Optimize Portfolio, they talk all about these leverage funds all the time. I will link to that again in the show notes. But if you're interested in these things, I would read a lot of the articles there because it does Compare and contrast them in addition to providing a bunch of different sample portfolios based on traditional portfolios. So looking at what you're proposing here, it looks like you're taking leverage of about 1.4 to 1, which doesn't seem to be too excessive to me. When you look at most plans for leverage, they do seem to be in the range of about that to about two to one with the golden ratio kind of in the middle of that about 1.6 to 1. There's another interesting article I've linked to before called Warren Buffett's Alpha, and it observes that you could model Berkshire Hathaway's performance as a leveraged performance based on the float that they hold with the insurance companies in that portfolio. And it's at 1.7 to 1. So 1.4 to 1 does not seem to be to be a huge stretch. It still will cause you to have severe downturns when the stock market falls. I think the only way to ameliorate that would be to add a little bit more small cap value into this. But I'm not sure that's actually going to make much of a difference over time if you have a big 2008 style downturn. I feel like this is something you could probably hold for five or 10 years and then reevaluate it as your Assets grow, your uncomfortability with the volatility may increase. Because it's one thing if you have $100,000 and it goes down 50%, it's completely a different thing if you have a million dollars and it goes down $500,000. You can't handle the gambling problem. I believe I had another listener who proposed just a couple episodes ago a portfolio of I think 30% UPRO and 70% small cap value, which would be a very similar idea. Now thinking about NTSX, that's actually something that somebody generally would use when they're trying to get some leverage in a portfolio, but what they're trying to do is construct a diversified portfolio that has the same expected return characteristics as the overall market. So, since that is a 60/40 portfolio levered up, what Corey Hoffstein and others have proposed is you could take something like that, take two-thirds of your portfolio and put it into NTSX, which would be like having a 100% in a 60/40 portfolio and then adding on top of that some kind of alternative investment such as managed futures. which in theory is going to have a similar return profile to a total stock market portfolio, but have less volatility and less risk. And something like that is what I believe Corey Hoffstein actually holds in his personal portfolio. I will find the YouTube video from Excess Returns where he describes that. That whole series from Excess Returns is very interesting. to many different people and just ask them what's in their personal portfolio. And so you get Corey Hoffstein and Rick Ferri and Larry Swedroe and a number of other people. What's interesting to me is how diverse those portfolios actually are and that a lot of them do not follow traditional ideas, if you will, but have been modified or modernized from typical recommendations. Anyway, I should mention that two of my adult children do play around with some leveraged funds in part of their portfolios, but I have told them that they would be best to limit their exposure to such things.

Mostly Voices [11:42]

All we need to do is get your confidence back so you can make me more money.

Mostly Uncle Frank [11:50]

A good place to do this is actually in a Roth account, but I don't think anybody should be afraid to experiment with this on a limited basis. particularly if they are in their accumulation phase and we're not talking about betting the farm on such a thing. Tina, you fat lard, come get some dinner! Anyway, hopefully that helps and thank you for your email.

Mostly Voices [12:19]

Boy, I tell you what, Dusty, I felt like a one-legged cat trying to bury turds on a frozen pond out there today. Second off.

Mostly Uncle Frank [12:31]

Second off, we have an email from Dennis and Dennis writes.

Mostly Mary [12:35]

Hi Frank, thanks for your podcast. I discovered it over Christmas and have gone back and listened to many, but certainly not yet all, of the old episodes. Apologies if you have covered this previously, but I would be interested in hearing your views on portfolio construction for an early retiree. 55 years, that is estimating about a 3% required withdrawal rate based on current size of portfolio, expected future pension, etc. Theoretically, if the portfolio can handle the volatility, then perhaps a higher allocation to equities is warranted. How would you think about optimizing a portfolio in this circumstance? Thanks, Dennis.

Mostly Voices [13:15]

D-E-N-N-I-S. the Dennis system.

Mostly Uncle Frank [13:24]

All right, yes I have answered a question like this before, but not for a really long time, so there's no reason I shouldn't be answering it again. So anyway, your question could actually be interpreted in two different ways, one as being 3% the maximum or the intended withdrawal rate, and another one being 3% as a minimum withdrawal rate as in 3% is covering your baseline expenses and then you plan to actually spend more than that. Let's deal with both of those ideas or questions. The first one being the if you plan to just withdraw about 3% out of your portfolio as a expected burn rate. Now the way I like to approach questions like this is to think about what is called the revealed preference of the person taking the action. And a revealed preference is an idea from economics that says that we don't care about what people subjectively say they're trying to do or want to do. What we are more interested in is the objective probable consequences of their action. And so when somebody comes and says, I intend to take only 3% out of my portfolio, what that is is a revealed preference for essentially dying with the highest net worth. Dead is dead. Because that is the most probable consequence of taking only 3% out of a reasonably or even not well diversified portfolio. diversified portfolio is that you will die at your highest net worth. From a psychological point of view, when I see people holding portfolios like this or having this intent, it generally implies a couple of different things. One, that they're fear-based and kind of myopic about what they're doing. And the second is they haven't actually grappled with the concept that they will die. And so they behave as if they are going to live forever. and therefore need to have a really low withdrawal rate. But I've got news for you.

Mostly Voices [15:42]

Here's a horoscope for everyone. Aquarius, you're gonna die. Capricorn, you're gonna die. Gemini, you're gonna die twice. Leo, you're gonna die.

Mostly Uncle Frank [16:01]

Anyway, so if You only need to have a 3% withdrawal rate. You can hold almost anything within reason. And what I mean by that is you could hold a portfolio that is only about 30% in stocks and the rest in bonds, annuities, cash savings, all sorts of other things. Or you could hold a portfolio that's a hundred percent in stocks and either one would work. The one that's a hundred percent in stocks would also imply a goal that you want to leave a massive fortune to somebody else. whereas the one with 30% in stocks implies a preference that you just don't want to have to deal with any volatility. It's kind of a sleep better at night kind of portfolio. But once you are talking about sleep better at night kind of portfolios, then you should be looking at things like bond ladders and annuities. Because what you're saying is you're really not cut out for investing in volatile portfolios. And when you get to something like age 70, the payout from a single premium immediate annuity is going to be over 7% these days. So you'd be much better off putting a chunk of change into that and taking the money than trying to fiddle around with some complicated portfolio involving a bunch of buckets and flower pots and ladders and junk. That's not an improvement. Thinking you're doing something because your strategy here is just don't spend much money. It has nothing to do with your machinations and ability to construct a portfolio.

Mostly Voices [17:31]

Forget about it.

Mostly Uncle Frank [17:35]

So the simplest solution for somebody who wanted to just draw 3% and not think about it would be to invest in something like the Vanguard Wellesley Fund, which is a 35-65 stock bond portfolio with the stocks focused on large cap value kind of stocks. And you could just do that and be done and then add some annuities or other things as you age. Or you could go with a Vanguard Wellington or some kind of simple pre-fund portfolio or as much stocks as you wanted. I think J.L. Collins holds an 80/20 portfolio and he plans on leaving a legacy so he's in this low burn rate kind of environment. And if you look at most financial gurus you could name, they are mostly spending well under what they could spend, which is why their portfolios can just be all over the map and it really doesn't matter because they're all going to die with their highest net worth anyway.

Mostly Voices [18:29]

That's the fact, Jack! That's the fact, Jack!

Mostly Uncle Frank [18:38]

And so in that line, if your goal is to simply accumulate as much money to give to somebody else or some charity at some point, then yes, you would want to essentially stay in an accumulation kind of portfolio with lots of stocks in it. And then your only questions are going to have to do with tax optimization because there's a lot of circumstances in which you may be better off transferring some of that wealth to whomever's going to get it anyway and not be holding onto it yourself. And that's another consideration that people have trouble grasping. I'm not dead.

Mostly Voices [19:12]

Well, nothing is, you know, I'm not dead. Here, he says he's not dead. Yes, he is. I'm not. He isn't. Well, he will be soon. He's very ill. I'm getting better. No, you're not. You'll be stone dead in a moment. I can't take him like that. It's against regulations. I don't want to go over the car. Oh, don't be such a baby. I can't take him. I feel fine. Well, do us a favor. I can't. Well, can you hang around a couple of minutes? He won't be long. No, I've got to go to Robinson's. They've lost nine today. fooling anyone, you know. Look, there's nothing you can do. I feel happy. I feel happy. Thanks very much. Watch out. And so they do kind of foolish things like live off their pensions and Social Security and then have this other pile of money which they leave in cash somewhere. And that's just not helping them.

Mostly Uncle Frank [20:05]

It's not helping their heirs. It's not helping anybody. You guys suck. Because what you should be doing is investing it for the person or entity who is actually likely to be using the money. And if it's not going to be you, then invest it like you're somebody else. Did you get that memo? But again, I think most of this suboptimal and irrational handling of finances in retirement has a lot to do with irrational fears and the failure to grapple with the concept that you're going to die in a limited amount of time. You can't handle the truth. So you may want to spend some of that money on therapy.

Mostly Voices [20:47]

Yeah, baby, yeah!

Mostly Uncle Frank [20:50]

Because irrational handling of money often causes a lot of problems in interpersonal relationships, both between the person hoarding the money and their relatives or heirs or spouses, and in the potential people inheriting the money who are likely to fight over it. Sorry we're closed.

Mostly Voices [21:10]

Well, what are all these people doing here? Drinking and having a good time. Well, that's why we're here. You're too stupid to have a good time.

Mostly Uncle Frank [21:38]

There was a great rational reminder podcast that came out a couple of months ago about this sort of wealth planning 3.0 for families and dealing with these sorts of issues and the sub-optimal behaviors that people have with respect to managing their family wealth. I will link to that in the show notes. It's an excellent discussion with somebody who's an expert in that area. Okay, now turning to the idea that 3% is your minimum amount you want to be distributing. That is more in line with what we're really talking about here and trying to do here, which is actually to maximize the amount we can spend in retirement. in a reasonable manner that will not cause us to run out of money. And if that's what you're trying to do, then you are trying to maximize the projected safe withdrawal rate of your portfolio as opposed to trying to maximize the amount you'll have at death, which would imply a stock heavy portfolio or minimize the overall volatility of the portfolio, which would imply one of these 30% stock portfolios or something involving annuities and bond ladders. So if you're trying to do that and 3% is your minimum, and that's the way I actually conduct our withdrawal management, is to have 3% be covering baseline expenses, what I call keep the lights on expenses, have another 1% for comfort expenses, which would be hiring people to clean your house and Do your lawn and paying for gym memberships and all sorts of other things that you could live without going out to eat, that sort of stuff. And then another 1% for extravagances, like expensive trips to Peru.

Mostly Voices [23:31]

Happy llama sad, llama mentally disturbed, llama super llama drama llama big fat mama llama. And so those are the kinds of portfolios that are we are.

Mostly Uncle Frank [23:45]

most interested in constructing here, and the golden butterfly and golden ratio are examples of those kinds of portfolios. If you look at the 100-year history of portfolios that maximize a projected safe withdrawal rate, they tend to have between 40 and 70% in equities with half of that, or at least half of that, tilted towards value. They tend to use treasury bonds as the kind of bonds that you're holding, generally intermediate and long-term treasury bonds. They tend to have 10% or less in cash or short-term instruments, and then they tend to have between 10 and 25% in alternative assets that are not stocks or bonds. And the way you test these things is by looking at historicals and then running Monte Carlo simulations where you take more than one portfolio and test it over a data set. As much data as you have available is generally the best idea and to use more than one calculator. And that is how you would optimize a portfolio to spend the most money from it. Which gets me back to the answer to your basic question. How would you think about optimizing a portfolio in this circumstance? That always just begs a question. Which is optimizing it for what? Because if your strategy is only spend 3% of it, your strategy is don't spend much money. That is how you're solving your retirement quandary or question. And since you're not optimizing for spending, that means you are optimizing for something else. And you need to really determine what is that thing you're optimizing for. You can't handle the crystal ball. And once you get honest with yourself about what you are optimizing for, then you can choose a portfolio such as a high equity exposure portfolio, which is optimizing for the largest amount to be held at death to be given to somebody else. Never go in against a Sicilian when death is on the line. And if you do want to be objective with these things, I think you really should be looking at this from the economist's revealed preference analysis of any portfolio and not subjective thoughts of various people. Do the objective analysis first and then add the subjectivity in after that based on your own preferences. Anyway, hopefully that helps and thank you for your email.

Mostly Mary [26:22]

Do you have anything from the Mother Earth that would be sprayed on me and cause me to have feelings again? 'Cause I'm having trouble feeling things.

Mostly Voices [26:32]

Last off.

Mostly Uncle Frank [26:36]

Last off, we have an email from Phil.

Mostly Voices [26:39]

Phil? Hey, Phil? Phil? Phil Connors? Phil Connors, I thought that was you.

Mostly Mary [26:47]

And Phil writes, Frank and Mary, this is a follow-up from an email you read on episode 315. Interesting, I wrote the earlier email while I was in Ecuador about at the same altitude you were at Machu Picchu. I wrote that at a cafe on the rim of Quito. Well, that is an interesting coincidence.

Mostly Uncle Frank [27:07]

I guess great minds think alike at high altitudes. Hopefully you were drinking some coca tea, which I found to be very helpful with the altitudes there.

Mostly Voices [27:25]

Looks like I picked the wrong week to quit I'm fed up with them.

Mostly Uncle Frank [27:28]

Anyway, if anything, that calls for some Andy and flute music. I am happy to indulge you in. And thank you for your email.

Mostly Voices [28:00]

to the the Na, Paonot the to Naan, Tnanaga and theanaga. And now for something completely different.

Mostly Uncle Frank [28:34]

And the something completely different is our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com. www.riskparityradio.com on the portfolios page. As I mentioned at the beginning, there isn't much to report this week at all.

Mostly Voices [28:50]

I have officially amounted to jack you squat.

Mostly Uncle Frank [28:54]

So feel free to skip this part if you really don't need to hear it. It's all on the website anyway. Looking at the markets last week, the S&P 500 was up 1.37% for the week. The Nasdaq was a big winner, was up 2.31% for the week. Small-cap value represented by the fund VIoV was up 0.49% for the week. Gold was down, it was down 0.89% for the week. Long-term treasury bonds represented by the fund VGIT were down, they were the big loser last week, they were down 2.17% for the week. REITs represented by the fund R E E T were down 0.17% for the week. Commodities represented by the fund, PDBC were up. They were up 1.97% for the week. Preferred shares represented by the fund PFF were down 0.06% for the week. And managed futures represented by the fund DBMF were up 0.34% for the week. Going to these sample portfolios, the first one is this reference portfolio. They call the All Seasons. It's only 30% in a stock fund. 55% in intermediate and long-term treasury bonds and 15% in gold and commodities. It was down all of 0.18% for the week. It's down 0.31% year to date and up 1.2% since inception in July 2020. Now moving to these more bread and butter kind of portfolios, first one's golden butterfly. This one's 40% stocks divided into a Total stock market fund and a small cap value fund, 40% in bonds, treasury bonds divided into short and long and 20% in gold GLDM. It was down 0.01% for the week, just about flat. It's down 1.09% year to date and up 19.21% since inception in July 2020. Next one's a golden ratio. This one's 42% in stocks and three funds, 26% in long-term treasuries, 16% in gold, 10% in a REIT fund, and 6% in cash in a money market fund. It was down 0.09% for the week, down 0.70% year to date, and up 16.23% since inception in July 2020. Moving to the Risk Parity Ultimate Portfolio, this one's kind of our kitchen sink where we put a little bit of everything, including a little bit of Bitcoin and Ethereum to make it interesting. I'm not going to run through all 15 of these funds. You can look at it on the website. But it was actually up 0.46% for the week. I think on the strength of that crypto. Excitement reigns with that. Good thing it's only a small portion of this. But it's up 0.05% year to date and up 6.89% since Inception in July 2020. Now moving to the experimental portfolios involving leveraged funds.

Mostly Voices [32:10]

Tony Stark was able to build this in a cave with a box of scraps.

Mostly Uncle Frank [32:16]

Don't try this at home, even though some of you do. Hopefully not for a decumulation portfolio, but only to accumulate something. First one is the Accelerated Permitted Portfolio. This one is 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 down 0.91% for the week. It's down 0.73% year to date. down 9.08% since inception in July 2020. If the stock market continues to perform well next week, we may end up with a rebalancing opportunity. We will see, but if the percentage of UPRO goes up to 32.5%, that would trigger a rebalancing. It's at 30.41% of the portfolio right now. Moving to the next one, which is our least diversified and most levered portfolio, the aggressive 5050. This one's one third in a levered stock fund, UPRO, one third in a levered bond fund, TMF, and one third in ballast PFF and VGIT. It was down 0.53% for the week. It's up 0.52% year to date. down 17.57% since inception in July 2020. This one also could potentially be rebalanced as the stock fund is now 40.7% of the overall portfolio. We'll check it again on the 15th. But if it's still there at that time, it will trigger a rebalancing.

Mostly Voices [34:06]

Real wrath of God type stuff. How exciting.

Mostly Uncle Frank [34:10]

Moving to the last one, our youngest one, the levered golden ratio. This one's 35% in a composite fund, NTSX, which is the S&P 500 and treasury bonds levered up 1.5 to 1. 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. and the remaining five percent in a managed futures fund, KMLM. It was down 0.15% for the week. It's down 2.21% year to date and down 15.37% since inception in July 2021. It's notable that the small cap fund, which is based on the Russell 2000, peaked in late 2021 and is still down about 20% since then, even though the broader stock market or the large cap part of the stock market is at all time highs again. One would think it would catch up at some point, as it has in every other period in history, but right now we're just waiting for that to happen at some point. Anyway, that concludes our portfolio reviews for the week. And 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 review, a follow. That would be great. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Mary [36:36]

and end e. . I to e 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.