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 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!

Mostly Voices [0:51]

And the basic foundational episodes are episodes 1, 3,

Mostly Uncle Frank [0:55]

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. Top drawer, really top drawer, along with a host named after a hot dog.

Mostly Voices [1:34]

Lighten up, Francis.

Mostly Uncle Frank [1:38]

But now onward, episode 319. Today on Risk Parity Radio, we'll just do what we like to do here, which is answer your emails.

Mostly Voices [1:49]

The Inquisition, wanna show the Inquisition, here we go. And so without further ado, here I go once again with the email.

Mostly Uncle Frank [2:03]

And first off, I have an email from Robert.

Mostly Voices [2:08]

My sweet Wesley, you've returned to me and our love. Through my ears as the Dread Pirate Roberts, all I could think of was this moment. You must have suffered greatly. Well, take those prisoners. Starve them all. Mary's really gonna like this one.

Mostly Mary [2:34]

Hello, Frank. I hope this email finds you well. First and foremost, I wanted to express my gratitude for the invaluable advice you share on Facebook and through your page and podcast. I recently stumbled upon your content and have been immersing myself in it ever since. However, I do have a question that I hope you can assist me with. Allow me to provide a brief overview of my current financial situation. I am 41 years old, and my aim is to retire within the next decade or so. Prior to discovering your work, I had been following the FIRE movement and reading J.L. Collins. Consequently, I've allocated 100% of my investments to stocks across all accounts. VTSAX and CHIL, except for my high-yield savings account. Here's a breakdown of my current asset allocation：Roth IRA $34,000 Traditional IRA $191,000 Brokerage $101,000 Employer 401 $68,000 HSA $9,000 HYSA $46,000 total $449,000. With this context in mind, I'm seeking your guidance on the optimal portfolio strategy for me considering my goal to maximize growth over the next decade. Additionally, I would like to know how I should adjust my portfolio after this period. Is there a portfolio structure that could meet both my short-term and long-term objectives? Furthermore, I'm uncertain about the implementation of this portfolio across my various accounts. How should I distribute or allocate these assets to ensure maximum tax efficiency, particularly given that selling assets in my brokerage account will incur taxable events? Additionally, when transitioning between portfolios, do you recommend a dollar cost averaging approach or a lump sum strategy? I understand this is a lot to digest, and I'm more than willing to provide any additional details or information you may require. Your advice and guidance are greatly appreciated and I thank you in advance for any assistance you can offer. Here are my overarching financial goals：1. Maximize contributions to my employer 401k, Roth IRA, and HSA annually. 2. Build a five-year cash cushion in my HYSA. 3. Reach a total of $1 million across all accounts, my FIRE target. Retire at age 50 or 51, relying on my brokerage account/HYSA until I reach 59 and a half. Implement the flexible 4% rule and adjust as necessary. Employ geo arbitrage to keep yearly expenses under $40,000. Take advantage of the Roth conversion ladder to minimize tax impact. Thank you once again for your time and expertise. Best regards, Robert. You're ready then?

Mostly Voices [5:42]

Whether I am or not, you've been more than fair. You seem a decent fellow. I hate to kill you. You seem a decent fellow.

Mostly Uncle Frank [5:50]

I hate to die. Beg again. All right, lots of good questions here. I'm glad you're enjoying the podcast.

Mostly Voices [6:01]

You are talking about the nonsensical ravings of a lunatic mind.

Mostly Uncle Frank [6:07]

And my other nonsensical ravings in various fora.

Mostly Voices [6:11]

Hey, it's all one big crapshoot, anywho.

Mostly Uncle Frank [6:15]

So this is a good time to take stock of what you've got here, because you're potentially around a decade away from pulling the plug on this. Let's see if we can go through some of your questions here in the order you asked them. The first one was, what is your optimal portfolio strategy for maximizing growth over the next decade? And it is to remain in 100% equities, like you basically are right now, except you're not quite really at 100% equities. Your portfolio is totaling 449,000 but you have 46,000 of that in cash in a high yield savings account. I would not count that right now as part of your retirement assets simply because you cannot expect those to grow significantly between now and in 10 years if you leave that money in a high yield savings account. That's the fact, Jack. That's the fact, Jack. So I would judge your progress right now as having about $400,000 invested, available, growing for retirement. Now, on average, that will grow to about a million dollars over the course of 10 years of left in a 100% stock index fund. That doesn't mean it necessarily will. It'll probably be worth a lot more or a lot less. But if you look at average returns over that period, that's approximately what you'll have. Now of course I'm not including now any future contributions and there will be future contributions. So I would expect the probability of you making it to a million dollars starting with $400,000 10 years before retirement are pretty good. Now you asked if you should make adjustments to your portfolio in this period. Technically, you wouldn't need to, but here's the real issue. You are planning to retire in 10 years, so what you need to be thinking about is what is the stock portion of my portfolio likely to look like at retirement? And I would recommend that the stock portion of your portfolio be half growth and half value tilted. Right now, it's 100% growth tilted because VTSAX is a growth tilted fund. So to me, what makes the most sense right now is if you were to make your future contributions in value tilted funds. And small cap value is the easiest way to do that. I would look at funds like VIOV and AVUV. as good options for that. Because eventually, when you do retire, you are going to want to diversify out of VTSAX into half value and half growth, because that kind of portfolio gives you the highest projected safe withdrawal rate. That's one of the key ways of improving the safe withdrawal rate of a portfolio is to make at least half of it value tilted. Now, you could continue just to go with VTSAX and then make the conversion later, but I think it's easier, at least in the accounts where it's available, to simply start buying the thing that you want to add anyway in the end. If you did expect to or want to have a different setup in your portfolio when you get to retirement in terms of the stock funds only, then I would start buying whatever it is you think you want to add to VTSAX in this portfolio. And right now, I'm just talking about the stock portion of it. Now, your next question is when are you likely to make that transition? And just looking at your numbers, I think it's going to be likely when you get to about $700,000. And again, I'm not including the cash that's invested in these retirement funds. And that could happen relatively early. if we have a good run or it could be relatively late, in which case you may want to wait longer to make the conversion. But if you found yourself, for example, with $750,000 in your retirement funds in five years and you needed a million to retire in another five years, I would be thinking about converting your accumulation portfolio to a retirement portfolio. because what you're really concerned about is having some kind of big drawdown right before you actually pull the plug on retiring. All right, your next question was implementation of this portfolio across various accounts. At this point, you are just talking about accumulating more index funds so they can really go in any of these accounts that are very tax efficient. The real question and the one I can't answer is what is your current tax rate? So what kind of advantage are you getting out of a traditional IRA at this point in time or traditional 401k? Because right now what you are planning on doing, if you're only going to be taking $40,000 of income in the end, you're going to be in a very low tax bracket if you do that. the one question I had about that is are you including future taxes in that 40,000 because you need to taxes are part of your expenses. So if you think that you're going to be living on 40,000 and you haven't added the taxes in you may need to up that figure to 45 or 50,000. But I can tell you at a 40 or $50,000 income you're just not going to be in a very high tax bracket. In fact, you're going to be low enough that you'll be in the 0% capital gains tax bracket for some of this stuff. And if you are in the 0% capital gains tax bracket now, I would be doing some tax gain harvesting on that. I'm doubting that you are. And I realize all of this is a little bit vague, but the problem is I don't know how much you're making right now. So you can't do a tax comparison here. I probably would try to get a bit more in the brokerage account or in the Roth IRA if you are actually retiring at 51 because you will have some difficulties getting the money out of the traditional IRA or the employer 401k. Of course, when you hit your 50s, 72t becomes a very useful thing to use because you don't have to use it for that long. But that is when you are taking out what they call substantially equal payments. And I think I heard a podcast recently with Sean Mulaney, the Fy tax guy in it, who can talk more about that. But that is something I would be looking up to consider whether you want to use that method to get the money out of your 401k and your traditional IRA early without paying any penalties. I think there's going to be more than one way to skin the cat in the end, so I'm not that concerned about it right at this point in time. Now you asked about transitioning portfolios. The ideal way to do that would be to wait until your current portfolio is at or near some kind of all-time high and you have accumulated enough that you know you can glide in. So in that scenario where you had $750,000 in your portfolio five years from retirement and you are at or near an all-time high, you could make the conversion pretty much all at once at that point if you wanted to. Whether you do that over a period of years or do it by just simply buying the new assets though, sometimes that makes sense from a tax perspective because then you don't have to just sell a bunch of stuff and buy a bunch of other stuff. But in the ideal world, you would be able to do that all at once, basically when you felt that you had accumulated enough money such that you could just glide into your retirement by doing the conversion early, several years before you actually retire, and then just letting it continue to grow. It'll grow at a reduced rate, but it'll continue to grow. All right, let's go through these goals you listed here. Number one was maximize contributions to my employer 401k, Roth IRA and HSA annually. Yes, that's a good idea. I agree you should do that. To the extent you can. Number two goal you have build a five-year cash cushion in your HYSA. I don't think that's a good goal if you want to retire early and if you want to maximize your safe withdrawal rate. Not going to do it.

Mostly Voices [15:19]

Wouldn't be prudent at this juncture. that is too much cash.

Mostly Uncle Frank [15:27]

That is essentially saying you want to hold 20% of your retirement assets in cash, and that is too much cash and that will not continue to grow. If you want to have a good portfolio for retirement, you should keep that cash holding to about 10% or less. Right now you already have it looks like a year's worth of expenses in cash. I don't think you need to increase that at all until you get closer to retirement. And then maybe that's like the last thing you fill up before you pull the plug on it. I realize this piles of stock and piles of cash portfolio is very popular these days because it looks good if you look at it over the past few years or the past 10 years. But historically that is not a good portfolio to hold in retirement. Historically, that kind of portfolio will have a safe withdrawal rate of about 3.5%, not 4, not more. Forget about it. And the other incorrect assumption people make on that is they think they are compensating for sequence of return risk by holding a big pile of cash. That is false. That does not work. Wrong! Wrong! Wrong! Right? Wrong! Wrong! Wrong! and the reason it doesn't work is that is not the sequence of return risk you actually care about. Any portfolio is going to be fine if it's a short downturn, three to five years. What you care about, what you're worried about is a decade long downturn. Like if you retired in 1999 and you were holding five years of cash, the stock market was going down for the first three years of that, you would have been spending all your cash. You run out of cash in about 2005. Three years later, you get walloped with 2008. That portfolio just died a horrible death.

Mostly Voices [17:22]

Never go in against a Sicilian when death is on the line. The same thing would have befallen you if you would have retired in something like 1969.

Mostly Uncle Frank [17:37]

That is the reason why a pile of cash, pile of stocks portfolio is not a good portfolio to hold in retirement unless your withdrawal rate is extremely low, in which case you can hold just about anything. But if you want to maximize a projected safe withdrawal rate, you cannot do that by holding a pile of cash. You need to be holding more diversified assets both in terms of the stocks you're holding, the bonds you're holding, and alternative assets that you're holding. Because that's how you would survive a 10-year bad decade for returns, not with five years of cash. So I would cross that off of your plans because in addition, it's also going to slow you down in accumulation like that current pile of cash is actually slowing you down in accumulation right now. Right now, all you actually need is enough money for an emergency fund. And if that's a year of cash, that's fine. For most people, it's probably not that much. All right, goal number three, reach a total of $1,000,000 across all accounts. You're a fire target. I think you're well on your way to doing that, and the only thing that's going to be an impediment is you're hoarding lots of cash, because your cash is not going to grow, and you're not going to make it to $1,000,000. if you're putting all your money in cash.

Mostly Voices [19:00]

You're not going to amount to jack squat.

Mostly Uncle Frank [19:04]

At least not in 10 years. So as long as you are investing that money in stock index funds right now and then converting it to a retirement portfolio, when you get close, you should be fine to make that goal. Goal number four, retire at age 50 or 51 relying on your brokerage account. HYSA until you reach 59 and a half. As I said, I think you can make that goal, but I don't think you necessarily just need to rely on your brokerage account and a high yield savings account because there are ways of getting out that money out of your IRA and 401k penalty free. And you want to actually take advantage of some of that because your taxable income is going to be so low that you do want to spread that out over as many years as possible. So I would be looking into 72t and the other methods that you might use, including Roth conversions, but I think 72t is probably going to work the best in this circumstance. If you were to work until age 55, I would say you'd probably be able to use the rule of 55 if that applies to your employer 401k. But we don't know whether that's true and you don't want to work that log anyway. Forget about it. All right, goal number five, implement the flexible 4% rule and adjust as necessary. Okay, this is where we get to talking about safe withdrawal rates. And a projected safe withdrawal rate is dependent on essentially three things. First, it's dependent on what kind of portfolio you have. Not all portfolios perform the same. The ones we talk about here, like the Golden Ratio and Golden Butterfly and things like that, tend to have historical safe withdrawal rates of about 5%, not 4%. And so if you want to be taking out more money, you probably want to have a better diversified portfolio like that. On the other hand, if you had a portfolio that was, for example, 80% stocks and 20% in cash, that probably only has a projected safe withdrawal rate of about 3.5%, historically. But you will want to run your own simulations of different portfolios. Pick a portfolio you think you want to hold. Go to Portfolio Charts, put it in there. See what it's done historically since 1970. Go to Portfolio Visualizer, put it in there, do Monte Carlo simulations there. See how those would have come out, compare that with other portfolio options. And then also I would download the toolbox from early retirement now because that goes back a hundred years. It doesn't have all of the different assets you can put in it, but it has enough in there that you can test some interesting portfolios. Now, I have a number of podcasts on the 4% rule. The most recent one I can think of is episode 294. Where we talk about this more specifically because the two other components here are first is what is your baseline withdrawal rate? What are you withdrawing in the first instance? And that could be a variable amount. And then the other one is how are you going to adjust this withdrawal over time? Because the original 4% rule assumes that you are going to add CPI inflation to your withdrawal every year, regardless of how much money you're actually spending. In practice, that does not make any sense. It makes more sense to use variable withdrawal rules and to only take out the money you actually need, which is usually less than CPI inflation would imply. So, for example, if you were an average retiree, you will probably be experiencing inflation at essentially CPI minus 1%. And if that were your withdrawal addition every year or something like that, then your safe withdrawal rate is going to go up by about 0.5 to 0.6%. What I'm honestly saying here is that there's no reason you can't have a safe withdrawal rate closer to 5% than 4% if you use a better portfolio and if you use some variable withdrawal rates. No more flying solo. You need somebody watching your back at all times. All right, item six, employ geo arbitrage to keep yearly expenses under $40,000. Well, if you can do that and actually experience negative inflation or close to zero inflation over time, then your safe withdrawal rate's going to increase to about five and a half to 6%, believe it or not. But that's also going to be part and parcel with a variable withdrawal rate strategy. Number seven, take advantage of the Roth conversion ladder to minimize tax impact. Yeah, I would look into that, although I don't think your taxes are going to be that high if you're living on $40,000 a year and a lot of it is accumulated in a brokerage account, so it's not all being taxed anyway or out of a Roth, so it's not being taxed anyway. so I would be looking into that as well as things like 72t. Now as you can imagine, we've talked lots about the 4% rule over the past several years here. Let me give you a list of podcast episodes to listen to for more on this. I would listen to episodes 66, 97, 148, 149, 160, 210, 223, 238, 264, and 276 in addition to episode 294 that I already mentioned. And that will give you a flavor of all the different parameters and thoughts that we have about that ear. Overall, I think you're in good shape and well on your way to reaching your goals here. Just don't Fall for the siren song of big piles of cash, thinking that will remedy your situation or make it better. It will only make things take longer.

Mostly Voices [25:24]

That's not an improvement.

Mostly Uncle Frank [25:28]

Hopefully that helps, and thank you for your email.

Mostly Voices [25:31]

Sire, the finest Iocane powder. Yeah, on the Dread Pirate Roberts. No, biggie, it was mostly sailing and fishing. But you were the most feared pirate on the open sea. Perhaps now is a good time to mention I have syphilis. Second off.

Mostly Uncle Frank [25:52]

Second off, we have an email from my contact info.

Mostly Voices [25:56]

Oh, I didn't know you were doing one. Oh, sure.

Mostly Uncle Frank [26:00]

And my contact info rights. Hi, Frank.

Mostly Mary [26:04]

Ben Felix from Rational Reminder Podcast in an article below discusses the paper you have mentioned several times.

Mostly Uncle Frank [26:11]

Well, Laddie, Frickin' Die! Well, you have links to an article from Ben Felix about understanding the role of bonds in a retirement portfolio and talking about the now infamous Scott Cederberg paper that's been floating around and that we have critiqued before as not providing a realistic analysis for anyone investing today. So I will link to this in the show notes, but let me just flag something that's even more interesting about this paper. Carsten Jeske, also known as Big Earn, did a very nice, very lengthy article on that paper in his Early Retirement Now blog, which just came out this past week. And it is most excellent work. really gets after all of the problems with this study and what they're relying upon and how they're dealing with it. One thing he observed towards the end is that some of this data is probably not data that we're ever going to see again, particularly that surrounding the German markets around World War I, both before and after. and he mentioned the famous Pickelhaube hat that the Germans wore in World War I. That is the one with the spike on top of it. Which led me to refer to this Cedarberg portfolio as the Pickelhaube portfolio. and in fact, I don't think anybody is going to be holding something like the PickleHaba portfolio these days, because you would have to be investing in speculative bonds in unstable currencies. But that is what is being modeled. in that paper and why bonds look so bad. I suggest you stick to treasury bonds in world reserve currencies and not speculate in bonds that way in your retirement portfolio or otherwise. Anyway, I will link to your article and Karsten Jeska's article in the show notes. And if you are interested in that paper still, then I commend you to read both of those Critiques and thank you for your email. Last off, we have an email from Stuart. Stuart is one of the family now. We do not eat family members.

Mostly Mary [29:13]

And Stuart writes：Frank, I listened to Blake's comment on the behavior of leveraged ETFs in episode 317 relative to the underlying ETF and looked at the linked documents. Blake's comment related to the outperformance of LETFs during trending markets. The reason that LETFs do better in trending markets is because of compounding. Each day the asset has a larger total gain for the same percentage gain because the asset value is larger. For example, consider an asset that returns a constant daily return that compounds to 5% return over a year of trading days. Once that returns twice the daily return compounds to 15.8% return over the same period, 3.2 times greater compounded annual growth rate, and one that returns three times the daily return compounds to 34% over the same period. 6.8 times greater compound annual growth rate. The bigger the cumulative return in the underlying, the larger the relative outperformance of the levered asset. Going down, compounding is a little more complicated because the asset is shrinking in value every day. The shrinking remaining value means that less total loss can occur the next day for the same percentage loss. Consider an extreme case where the underlying has lost 60% of its value over multiple days. The levered assets still have positive value, so they cannot perform like 2x or 3x the underlying. When the total loss is small, the levered assets mimic the uptrending case and lose disproportionately more than the unlevered. 3x asset ends up losing less than 3x the underlying once the underlying has lost about 29% of its value, and the 2x asset ends up losing less than 2x the underlying once the underlying has lost about 40% of its value. You have a gambling problem. Not to minimize anything, losing 3x of a 29% loss or losing 2x of a 40% loss is huge. Well, you have a gambling problem. Nevertheless, during sufficiently large crashes, there would be a mathematical benefit in starting with one-third of a portfolio in a 3x fund and two-thirds in a riskless fund. and rebalancing after the large drop rather than holding 100% of the portfolio in the underlying. Of course, this would all be very hard to pull off from a behavior and crystal ball standpoint. You can't handle the gambling problem. This is just a clarifying comment. Not a question.

Mostly Voices [31:53]

Yes, well, it does sound like fun. I can't wait to start poohing through my garbage like some starving raccoon.

Mostly Uncle Frank [32:01]

Well, since you didn't actually have a question, I will not answer a question. I will refer other listeners back to episode 317, which is the episode that you're commenting on, and also episodes 259 and 251, where we also talked about both leverage in portfolios and whether it's better to take it through an ETF or by margin and in what circumstances. I think your proposal that you only take some leverage and not lever up the whole portfolio makes a lot of sense to me because of the potential losses with some of these things in a big downturn.

Mostly Voices [32:48]

Stand it's gone! Uh, what? It's gone. It's all gone. What's all gone? The money in your account. It didn't do too well. It's gone.

Mostly Uncle Frank [32:59]

And I still do think the optimal amount of leverage is somewhere between about 1.4 and 2 and is probably somewhere near the golden ratio, which is about 1.6 to 1. And you will find an article in the show notes for episode 251 that discusses that, which I will also see if I can Link to again in the show notes. I feel like we're going to need to start a gambling problem section to this podcast to discuss all of these things. So I know a lot of you are very interested in them. Oh, Mr.

Mostly Voices [33:32]

Marsh, don't worry, we can just transfer money from your account into a portfolio with your son, and it's gone!

Mostly Uncle Frank [33:40]

Even though I think they're a bit too risky to be putting into most retirement portfolios, at least in any size. But this is certainly a developing area. And I thank all of you who are investigating it in a reasonable manner and telling me about it so I don't have to. Fat, drunk, and stupid is no way to go through life, son. Anyway, thank you for your email. But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frank@riskparityradio.com That email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com and put your message into the contact form and I'll get it that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, give me some stars, a review, a follow. That would be great. Mmmkay? Thank you once again for tuning in. this is Frank Vasquez with Risk Parity Radio signing off.

Mostly Mary [35:04]

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.