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 [0:36]

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

Mostly Voices [1:34]

Lighten up, Francis.

Mostly Uncle Frank [1:37]

But now onward, episode 334. Today on Risk Parity Radio, just gonna get back to doing what we do best here, which is answering your emails. Look, it's MacGyver.

Mostly Voices [1:58]

Do you know how to pick locks? And so without further ado, here I go once again with the email.

Mostly Uncle Frank [2:04]

And first off, I have an email from Kyle.

Mostly Mary [2:09]

Kyle! And Kyle writes, Dear Frank and Mary, 300 plus episodes and still the best podcast around.

Mostly Voices [2:22]

The best Jerry, the best Frank, Thanks for your work.

Mostly Mary [2:26]

Not so much a question, more an invitation for commentary. Backtest 9060 S&P with long-term treasuries. Same plus 9060 via 3x ETFs. Same plus NTSX. With each addition to the backtest, the date range shrinks, but I thought it was an interesting comparison nonetheless. Thoughts? Thanks, Kyle. This is the end, man.

Mostly Voices [2:52]

It's you and me.

Mostly Uncle Frank [2:56]

Well, yes, this is kind of an interesting comparison you've got going on here. We've got three portfolios in Portfolio Visualizer.

Mostly Voices [3:05]

Three is a magic number.

Mostly Uncle Frank [3:09]

Yes, it is. It's a magic number. The first one is a theoretical portfolio comprised of 60% in the Vanguard Long-Term Treasury Mutual Fund, 90% in the Vanguard S&P 500 Mutual Fund, and then an application of negative 50% in cash, meaning leverage in the portfolio visualizer Tool. And then the second one is the 75% in the S&P 500 index fund SPY, 5% in UPRO, the leveraged S&P 500, and 20% in TMF. And then the last one is just a portfolio of NTSX, which is the leveraged 90/60 portfolio. And in theory, all of these should be about the same. because they're all trying to model the same kind of portfolio that is essentially a 60/40 portfolio levered up by 1.5 to 1. But you have less and less data as you add more and more of these funds to this analysis. So the first analysis goes all the way back to 1986 and shows that this theoretical leveraged portfolio has a compounded annual growth rate of 12.3% versus 10.65 for the regular S&P 500. The second one, adding the leveraged funds to it goes back to 2009 and we see that the theoretical portfolio has a compound annual growth rate of 15.11, whereas the one with the leveraged fund is at 14.9, which is actually pretty good. I would think it would be a lot lower given the cost of the leverage in those funds. But where we see the biggest discrepancy is in the more recent analysis that involves NTSX and this one only goes back to 2018. And in this one it shows that NTSX actually has a better return than the theoretical portfolio 10. 54 compound annual growth rate versus 10.05 for the the theoretical portfolio and then the one with the leveraged funds in it is dragging at 9.48% compounded annual growth rate. So in some respects, what it suggests is that these leveraged funds actually work in terms of matching up to their theoretical performances, but that they have what is called tracking error that NTSX seems to match up pretty well, whereas when you construct one of these leveraged funds, you get something that is not quite the same. And the real question is, was there some kind of a breakdown since 2018, or is it just because we don't have that much data since 2018 to run this comparison with? And either one of those things could be true. You can't handle the truth. I do note that that leveraged bond fund, TMF, has a had a particular poor experience over the past couple of years with the raising of the interest rates. But this is something we've been wondering about since we put together these experimental portfolios at the beginning of this podcast, which was reflecting the proposed uses of it in things like Hedge Fundies Adventure and other such concoctions, because it had seemed to work well in combination portfolios with UPRO since 2009, but there had not been a serious dislocation in interest rates like we saw in 2022, which is kind of a 40-year or more event. It also though does seem to confirm that funds like NTSX, which are designed for long-term holdings with leverage in them, are viable choices or viable things to use for portfolio construction. I still don't really like these combo things because it makes it difficult to construct a portfolio when the leveraged component has two or more things in it already, because then you have to sort of work around that with whatever else you're putting in the portfolio. But I could see using something like that in combination with something like a managed futures fund to do a return stacked Corey Hoff scene kind of thing. and get some decent results. At least they look pretty decent just over the past few years. But NTSX has only been around since 2019. Anyway, it's always quite interesting to see what other people come up with by playing around with these concepts and new funds. And so thank you for your email. I want to hold you every morning and love you every night, Kyle. I promise you nothing but love and happiness. Second off, we have an email from Andrew.

Mostly Mary [8:31]

And Andrew writes, hello Frank, I have really enjoyed your podcast as it was my introduction to portfolios beyond the all stock. I am 36 years old and am planning to retire around age 42. I am looking to optimize my safe withdrawal rate, allowing me to retire as soon as possible. I was listening to your answer to John's email in episode 329 and was starting to wonder how to set my safe withdrawal rate. In your answer, you mentioned that the perpetual withdrawal rate of 6.1% was not to be used as an actual withdrawal rate, but instead a number to compare to other portfolios. I decided to check out the Golden Butterfly at Portfolio Charts and saw that at 45 years, the safe withdrawal rate was 5.3%. If that is not a number to bank on, then how should I set my safe withdrawal rate? Thank you, Andrew.

Mostly Uncle Frank [9:26]

Well, the short answer to your question is to check your results on more than one calculator. because the data sets can be different in different calculators. Portfolio Charts has now updated their safe withdrawal rate calculator. And so it now gives you both a safe withdrawal rate curve, but also a perpetual withdrawal rate curve and then a long-term withdrawal rate, which is kind of between those two things. And for the Golden Butterfly Portfolio, which I'll link to in the show notes, It shows that it has a 6.1% safe withdrawal rate at 30 years and about that same 5.3% or 5.4% out at 45 years. The perpetual withdrawal rate, worst case scenario, is at 4.6% and then the long-term withdrawal rate is right there around 4.9%. And he's also described how these calculations are done. So when you are getting figures like that that are all around the same place you can have a lot of confidence in them. Because the other way you're really going to manage this is by having variable withdrawals or some kind of variable withdrawal strategy. All of these calculations are based on the idea that you would take that as your withdrawal and then add CPI based inflation to it every single year regardless of what your actual expenses are going to be, in fact, that's not how people behave. And so if you are willing to not inflate your lifestyle at that rate every year, or have some flexibility in the general withdrawals, which is the most likely situation, any of those numbers are going to be fine in terms of managing your portfolio going forward. Because you can get another 0.5 to over 1% just by using variable withdrawal rate strategies. So as a practical matter, the way we divide these up is basically on a 3-1-1 kind of strategy if we're using 5% as kind of the spending goal every year or roughly that. And so 3% we allocate towards baseline expenses, keep the lights on expenses is what I call them. That's taxes, utilities, gas, basic food, health care expense. Then we use another 1% for what I call comfort expenses, which would be things like eating out and getting somebody to do your lawn or clean your house, things that you don't need to do but you like to do on a regular basis. And then we have another 1%, which I call extravagances. But it's basically any kind of discretionary expense that is not going to be reoccurring is the way I look at this expense. So we took an expensive trip to Peru this year for our 30th wedding anniversary. We're not going to be doing that every year. Not going to do it.

Mostly Voices [12:26]

Wouldn't be prudent at this juncture.

Mostly Uncle Frank [12:30]

Some years we'll spend that on travel. Some years we'll spend that on renovating part of the house. Some years we'll spend that on buying a new vehicle or something like that. Or if we had some kind of unexpected expense or something, we could use it for that as well. So I think you can easily bank on 5.3 or something around there, as long as you're willing to be flexible, because the flexibility would put you up around six anyway. I do think that generally 5% safe withdrawal rates ought to be achievable if you use better portfolios and if you use variable withdrawal rate strategies. because I think that too many people do-it-yourselfers and too many financial advisors just set the bar way too low where people are just going to run out of life long before they run out of money and end up at their highest net worth on their deathbed. Dead is dead. But I've learned that people don't like to hear these things because it causes cognitive dissonance and that they've had this raft of excuses about why they could not spend money or why they are not spending money that can be easily dismissed. Or if they're financial advisors, it's very comfortable to set a very low hurdle rate to reach.

Mostly Voices [13:47]

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

Mostly Uncle Frank [13:54]

And of course, it leaves plenty of room For the fees. Am I right or am I right or am I right? Right, right, right.

Mostly Voices [14:03]

And if you're sending 1% to the advisor every year, that is

Mostly Uncle Frank [14:08]

actually your largest expense.

Mostly Voices [14:12]

I drink your milkshake.

Mostly Uncle Frank [14:18]

Unless you're getting a whole lot of service some other way. Quick time, hooray. I love quick time harch. So maybe that is not quite a good idea. I drink it up. Anyway, Andrew, I think you're on the right track here. And my main comment in episode 329 was simply that you should use more than one calculator and that the best use of these calculators is to compare one portfolio against another. So, if you are assuming that a 60/40 portfolio has a 4% withdrawal rate and you compare it to one of these kind of portfolios and you see that the safe withdrawal rate is 1 to 1.3% better, that tells you that unless we're reducing all the safe withdrawal rates, that relationship is likely to hold since most of the assets in both of those portfolios are similar. and this is just giving you more than one way to verify what you're looking at so you can have confidence in it. Hopefully that helps. Please write in again if it causes you any confusion and thank you for your email. Next off, we have an email from Samir.

Mostly Voices [15:53]

No one in this country can ever pronounce my name right. It's not that hard. Nai-ee-najad. Nai-ee-najad. Yeah, well at least your name isn't Michael Bolton. You know, there's nothing wrong with that name. Go by Mike instead of Michael. No way. Why should I change? He's the one who sucks.

Mostly Uncle Frank [16:12]

And Samir writes. Some excellent content here. Many pearls of wisdom on asset allocation for individuals.

Mostly Mary [16:20]

Well, thank you for your compliments. They're well received.

Mostly Voices [16:25]

You are correct, sir, yes. As are your criticisms, if they are well founded.

Mostly Uncle Frank [16:33]

I wasn't sure if this was your whole email, though, since you sent it through the website. And sometimes these do get cut off if you do have more you wanted to say or something you wanted to ask. Please send in another email. I would send it straight to the email if you can. That's frank@riskparityradio.com that email is frank@riskparityradio.com because I tend to get those in better shape than sometimes the ones that come through the website. But my goal here is to give you some additional ideas and some additional information and make you think.

Mostly Voices [17:10]

Hello, hello, anybody home?

Mostly Uncle Frank [17:15]

Think McFly, think! And hopefully make you update your priors because so much of the information floating around on this topic and in Do It Yourself Land is obsolete and predates the days when we had robust tools like portfolio charts and portfolio visualizer to actually look at these portfolios in depth and compare them. and look at their safe withdrawal rates. So if what you're relying on is something that existed in 2010, there's a good chance it is not the best practice in 2024. A good example of that is how people treat Bill Bengen's work. It seems that everybody seems to know about Bill Bengen's work in the 1990s in coming up the original 4% rule. based on a couple of papers he wrote then. But these same people seem to ignore what Bill Bengen has done since then and what he has said most recently in the past few years, which is simply, if you have a better portfolio, you should have a better safe withdrawal rate. And one of the things that he notes is a big driver of that is simply having small cap value as part of your stock allocation.

Mostly Voices [18:34]

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

Mostly Uncle Frank [18:42]

Which according to him by itself raises the safe withdrawal rate from around 4 to about 4.5 or 4.6. Now why people are happy to accept and cite the earlier work while ignoring the later Bill Bengen is somewhat of a mystery. But not really. It is human nature.

Mostly Voices [19:06]

Surely you can't be serious. I am serious, and don't call me Shirley.

Mostly Uncle Frank [19:15]

And it is exactly what we're talking about when we're referring to the foolish consistency that is the hobgoblin of little minds, adored by little statesmen, philosophers, and divines. And in that vein, I note that Larry Swedroe's got a new book out called Enrich youh Future. I've listened to a short interview of him about that, but I'm sure there'll be more coming out, and evidently it does summarize a lot of best practices that he's acquired and learned over his career, including a lot dealing with factor investing that he's also written about extensively. And hopefully we can use that to update our priors as well.

Mostly Voices [19:52]

Yes!

Mostly Uncle Frank [19:56]

Anyway, you didn't ask for all that, but thank you for your email.

Mostly Voices [20:00]

You know what I would do if I had million dollars? I would invest half of it in low-risk mutual funds and then take the other half over to my friend, Asadullah, who works in securities. Sameer. Sameer, you're missing the point.

Mostly Uncle Frank [20:12]

Last off. Last off, an email from James.

Mostly Mary [20:30]

And James writes：hello Frank, not sure if you saw this article making the rounds about Fidelity starting to charge $100 for purchasing certain ETFs, including Simplify. Seems like a step backwards for the industry to me. Thanks, James. [The Huh.

Mostly Uncle Frank [20:56]

] well, yes, I have seen a couple articles about this. It is an interesting consequence or fallout from the no fee trading revolution, if you will. As you can imagine, there is somebody who's actually paying the fees when it comes down to this, and it is in a way paid for by the ETF suppliers, and not all ETF suppliers have been willing to essentially pay up. And so this is a spat between Fidelity and some of those ETF providers. I'll link to a article on ETF.com that was written after you sent your email to me. But just a couple of quotes from that. Tim Holsworth, president of AHP Financial in Midland, Michigan, shrugged off the surcharge as the cost of doing business for ETF issuers in an age of commission-free trading. This looks like potentially higher fees at the trading level only, he said. I don't see that as an ETF management charge because it only applies to those firms who are not part of Fidelity's program. Tom Graff, Chief Investment Officer at Facet in Phoenix, Maryland, agreed that the move by Fidelity is the ultimate fallout from removing trading commissions on brokerage platforms. In effect, this is how they pay for zero commission trades, he said. I would say by Fidelity adding this surcharge there saying that they would prefer to funnel client money into larger ETF providers. And my guess is that they will work this all out before the fee would go into effect, because for somebody to create an ETF and then not have it to be able to be traded on some of the largest platforms like Fidelity is just a waste of time, effort and money. This does, though, represent more of this kind of evolution in financial services that tends to favor customers over suppliers. Basically, as we see the old fee models being creatively destroyed, the suppliers of brokerage services and funds have to be more efficient in what they're providing in order to compete. And so it's capitalism at its finest, driving prices down and pushing the benefits out to the users or customers instead of having them be all accrued to the providers and suppliers. So we'll see what happens in the next couple months, but my guess is that they will all kiss and make up, and this will not have any effect on our ability to use these ETFs, or the ETFs themselves will just go away. But I think that highly unlikely. I do see that Fidelity itself is now creating a lot more ETFs. They had traditionally been just a mutual fund provider. and cut their teeth on managed funds is how they made their bread and butter back in the last century. But now has a number of funds and now has even a Bitcoin fund and is putting out some of these buy right option kind of funds as well that I just saw recently. The more the merrier, I say, as long as the fees keep going down. Yeah, baby, yeah! Now we just need to work on creatively destroying some of the other parts of the financial services industry.

Mostly Voices [24:24]

Watch out for that first step, it's in doozy!

Mostly Uncle Frank [24:28]

An interesting topic, and thank you for your email.

Mostly Voices [24:31]

Because we're adding a little something to this month's sales contest. As you all know, first prize is a Cadillac El Dorado. Anybody want to see second prize? Second prize is The steak Third prize is you're fired.

Mostly Uncle Frank [24:50]

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 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 Voices [25:33]

Somewhere in the ancient mystic trinity, you get three as a magic number. The past and the present and the future Faith and hope and charity the heart and the brain and the body Give you three As a magic number It takes three legs to make a tripod Or to make a table stand It takes three wheels to make a vehicle called a tricycle Every triangle has three corners Every triangle has three sides no more, no less yous don't have to guess When it's three, you can see it's a magic number. A man and a woman had a little baby. Yes, they did. They had three in the family. That's a magic number.

Mostly Mary [26:29]

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.