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 [0:19]

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!

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.

Mostly Voices [1:28]

Top drawer, really top drawer, along with

Mostly Uncle Frank [1:31]

a host named after a hot dog. Lighten up, Francis. But now onward, episode 336. Today on Risk Parity Radio, we're just gonna do what we do best here, which is answer your emails.

Mostly Voices [1:50]

And so without further ado, Here I go once again with the email. And... First off.

Mostly Uncle Frank [1:58]

First off, I have an email from Zane.

Mostly Voices [2:03]

Today we're talking about Zane Brany. And Zane writes.

Mostly Uncle Frank [2:06]

Hi Frank, news and data suggest that the global elite

Mostly Mary [2:10]

and investors are stockpiling gold at the fastest pace in history. Surely you can't be serious. I am serious. And don't call me Shirley. Do you see any particular reason for that? I mean, with interest rates high and stocks going up, it seems that appetite for risk is high and therefore people shouldn't be buying gold. I was reading a lot about unconscious collective actions and how it could precede a major global catastrophic event. Crystal ball clip here.

Mostly Voices [2:45]

Now the crystal ball has been used since ancient times. It's used for scrying, healing, and meditation.

Mostly Mary [2:52]

But could this be it? Thoughts? Thanks, Zane. Over? Did you say over? Nothing is over until we decide it is.

Mostly Voices [3:02]

Was it over when the Germans bombed Pearl Harbor? Germans? Forget it. He's rolling. It ain't over now.

Mostly Uncle Frank [3:11]

Well now we seem to be getting a bit twilight zony here. A dimension of sound. A dimension of sight.

Mostly Voices [3:19]

A dimension of mind. With collective unconsciousness. You're moving into a land of both shadow and substance of things and ideas you've just crossed over into the twilight zone. I have a few thoughts.

Mostly Uncle Frank [3:37]

First, you write news and data suggest that the global elite and investors are stockpiling gold. at the fastest pace in history. I'm not sure that that's true. It probably is not true. I hear a lot of speculation about such things, and there is some evidence that global central banks are buying more gold these days. But unlike the stock market, you can't just go and pull a data source and look at how many shares were bought and sold of something today. The world gold markets don't work like that, and they never have worked like that, which has made them notoriously difficult to predict. And I've actually never seen or heard of anyone who can predict the future price of gold consistently, because people will come up with little systems that work for some period of time, and then they just stop working.

Mostly Voices [4:30]

That is the straight stuff, O Funkmaster.

Mostly Uncle Frank [4:33]

There is some evidence that the price of gold is influenced by traders who are trying to assess global instability and risk, but I think it has more to do with the traders thinking that something will likely happen, and therefore they buy or sell into something or in response to something, and whatever it is does not actually pan out over a long period of time. There was a good example of this just this past week, in this past weekend, after the US Congress approved the aid to Israel and Ukraine and Taiwan. He saw the price of gold drop about $70 an ounce on Monday, and that usually is traders speculating on particular news. But in most cases, it's not the start of some trend. But it's interesting because the unpredictability of the price of gold is actually what makes it valuable as a diversifier in portfolios and is why it seems to just have zero correlation with stocks and bonds and a lot of other assets. And we'll talk a little bit more about that in answer to question three today. Yes! Now, as for this model of unconscious collective actions, I do not think that is a good model to use. Because there is no way of measuring or identifying unconscious collective actions? Forget about it. It's true though that human beings are prone to engage in crowd-like behaviors, and this has been written about for some time. The most popular historical text is the one by Gustave Le Bon. Le Bon, which is called the Crowd, a study of the popular mind. It was published in, I think, the 1890s. Other good books about that would be Charles Mackay's 1841 classic about popular delusions and the madness of crowds. And William Bernstein just wrote a similar book a couple years ago that is essentially a follow-up to the Mackay classic, which is also about the delusions of crowds. But none of those books talk about this being some kind of unconscious collective phenomenon. but more dependent on human beings' tendencies to communicate and then mimic each other. There is an excellent model from Rene Girard, the literature professor cum philosopher who died in about 2015, and that is called mimetic theory. And if you want to get into that, I suggest you start with a nice book by Luke Burgis, that was written a couple of years ago and it's called Wanting. So it's kind of Rene Girard lite, but it talks about why we want things in particular, how that's used to sell us things in the world. But mimetic theory goes well beyond that and does go to explaining the behaviors of crowds, particularly ones that chase around scapegoats and end up lynching them or some other violent conduct. Another useful model to use would be the Sand pile model of history, or rice pile model of history, which is an idea derived from fractals and something Nassim Taleb likes to talk about, that if you keep piling up rice or sand grain by grain on a big pile, it forms these mountains that eventually become fragile, and then eventually one grain that falls causes an avalanche in the pile. But again, that's not about unconscious behavior. It's about conscious behavior and not being able to predict which small incident sets off a larger incident. The event most pointed out as a good example of how this works was the assassination of the Archduke Francis Ferdinand that set off World War I. Because by itself, that act would not have been predicted to set off a world war. But it did. It was the grain of sand or rice that caused the avalanche in that circumstance. A good book to read about that is by Mark Buchanan. It's called Ubiquity. I would also read Mark Mobbsan's More Than youn Know and Applied to Financial Markets. I'd read the Misbehavior of Markets by Benoit Mandelbrot, who is really the father of all of the math that underlies these kinds of models. But just getting back to gold and what position it occupies in the collective psyche, there are a lot of bad and useless ideas floating around with respect to gold that have accumulated over the ages, if you will. A disgrace to you, me, and the entire gem state. And there's also a horrific marketing operation connected with physical gold that is just as disingenuous and bad for your finances as any annuity sales people. You could always use a little more. Am I right or am I right or am I right? Right, right, right. Gold has been intertwined with politics for at least hundreds of years, if not longer. In U.S. history, you only need to go back to the late 19th century where there were Lots of arguments and political platforms surrounding whether the US should remain on the gold standard or also incorporate silver as part of its monetary system, which led to the famous cross of gold speech by William Jennings Bryan, I think, at the 1896 presidential nominating convention for the Democratic Party.

Mostly Voices [10:15]

I come to speak to you in the defense of a cause as holy as the cause of liberty. the cause of humanity. Mr. Carlyle said in 1878 that this was a struggle between the idle holders of idle capital and the struggling masses who produce the wealth and pay the taxes of the country. They tell us that the great cities are in favor of the gold standard. We reply that the great cities rest upon our broad and fertile prairies. Burn down your cities and leave our farms and your cities will spring up again as if by magic. But destroy our farms and the grass will grow in the streets of every city of the country. We care not upon what line the battle is fought. If they say bi-metalism is good, but that we cannot have it until other nations help us, We reply that instead of having a gold standard, because England has, we will restore bimetallism and then let England have bimetallism because the United States has. If they dare to come out in the open field and defend the gold standard as a good thing, we will fight them to the uttermost. Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests and the toilers everywhere, we will answer their demand for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.

Mostly Uncle Frank [12:02]

And then it's become kind of a centerpiece for libertarian utopianism and other kinds of utopianism as if going back on a gold standard was gonna all bring us rainbows and unicorns and solve all of our problems.

Mostly Voices [12:13]

We're unicorns, unicorns, unicorns, yeah, we love you.

Mostly Uncle Frank [12:28]

We're unicorns, unicorns, unicorns, yeah, we make wishes come true, wishes come true, yeah. That's not what history tells us. It tells us that every monetary system Solves some problems and creates some other problems. So don't get your hopes up, whether it's gold or Bitcoin or some other tchotchke that you wish to use as money these days.

Mostly Voices [12:44]

Forget about it.

Mostly Uncle Frank [12:47]

But let's talk a little bit more about this physical precious metals racket, because I think you really need to be able to identify actors in this racket, because they just want to sell things to you. A always B, B, C closing.

Mostly Voices [13:03]

Always be closing.

Mostly Uncle Frank [13:07]

And my email box is constantly filled with people saying that such and such is going to happen, some president or some dictator or somebody's going to do something and that's why you need to buy gold today. And let me sell it to you and put it in this storage facility and create this physical gold IRA. which I can charge you fees on. A guy don't walk on the lot lest he wants to buy. And so all of this is just marketing. It's for people to make money off of physical metals. They're sitting out there waiting to give you their money or you're gonna take it. So you have a few different groups here who actually profit off this and they kind of all work in a symbiotic conspiracy, if you will. This is a conspiracy. That's what this is. And everyone's in on it. The first are the people that actually handle the physical gold, the brokers, the dealers, and the people that offer storage for your physical gold. And then now, as an ancillary service, we'll set up these special IRAs that charge high fees to store physical gold.

Mostly Voices [14:19]

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

Mostly Uncle Frank [14:26]

Now at the next level or going to the next outer circle, you see the people that profit because they sell ad time to the people that are selling these physical metals and services associated with physical metals. So if you are listening to podcasts in particular or reading newsletters or anything and you see a lot of ads for these sorts of things, the people who are providing the platform are also profiting off of this whole racket. So they frequently will bring these people selling this stuff on as guests on their podcast or to write columns or things in their publications, basically to sell more of their publications and to sell ad space to the people selling the physical metals.

Mostly Voices [15:27]

Bing again! It's not unlike people advertising new buffered funds or insurance products or a lot of other things that you see advertised in financial media. As 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 a set of steak knives. Third prize is you're fired.

Mostly Uncle Frank [15:48]

And then finally you have the newsletter sellers and authors writing books usually about end times or catastrophic times or some kind of calamity times.

Mostly Voices [16:00]

Real wrath of God type stuff.

Mostly Uncle Frank [16:04]

And often their solution involves hoarding physical Precious metals. All of our precious bodily fluids. These are people who we would refer to as hedgehogs in terms of what kind of expert they are, because they have one big idea that they just keep pushing over and over again, even though it's wrong all the time. Wrong! When their answer to you're wrong all the time is, well, I'm just early. I'll be right someday. You wait and see. Yes, cat, now I shall be ruler of the world. Anyway, all three of these groups work together to sell physical precious metals. If you are a real investor who really wants to use gold in a portfolio, you should do it like professional investors do. I'm talking about the hedge funds and use ETFs. That's what we use in the 2020s. It's the same reason we don't use physical stock certificates anymore. We don't put barbed wire along our property lines in suburbia to make sure people know where it is. And we don't behave like we're in some pre-industrial era. Bring out your dead. Bring out your dead. So the next time you hear an appeal for something like this, really think about who is speaking and why they are saying what they're saying and what benefit they personally get out of putting forth whatever opinion they're putting forth.

Mostly Voices [17:44]

A I D A, attention, interest, decision, action, attention. Do I have your attention? Interest? Are you interested? I know you are. You close or you hit the bricks. Decision.

Mostly Uncle Frank [18:06]

Have you made your decision in action? Because a lot of it is just not good for your financial health and you need to be able to identify charlatans and salespeople and not get caught up in some hype about global elites and new world orders, so on and so forth. You need somebody watching your back at all times. These people and these messages are not special, they're not unique. They're not even creative. It's all recycled ideas, many of which were bad ideas in the past and will be bad ideas again in the future.

Mostly Voices [18:34]

That's not an improvement.

Mostly Uncle Frank [18:37]

Anyway, hopefully that helps and thank you for your email. Bow to your sensei.

Mostly Voices [18:41]

Bow to your sensei. Second off.

Mostly Uncle Frank [18:49]

Second off we have an email from Slim Jim. Just need a little excitement.

Mostly Voices [18:52]

Snap into a Slim Jim.

Mostly Mary [18:56]

Oh, yeah! And Slim Jim writes：you：often mention that retired people usually spend less than they thought they would in retirement. To what percentage of retired Americans does this apply? Does this vary by the amount of retirement savings? Can you provide a reference for such statistics? All right, good question.

Mostly Uncle Frank [19:15]

Let's talk about some of the research and data here. the most familiar to most people is the David Blanchett research, which goes back about a decade or more now, in which he investigated the spending habits of retirees and discovered that they tend to track along what he termed the retirement spending smile, that they started relatively high or similar to what the working person would spend, and then went down in real terms over time and only came back up at the end and only if the person needed health care at the end of life. And so the retirement spending smile has been written about extensively, and I will link to an article from Wade Pfau's site in the show notes so you can get a picture of that. More recently, Morningstar in, I think it's last annual report about retirement spending strategies talked about how to model this retirement spending smile idea, and you can model it by using CPI minus 1%, essentially as a baseline assumption for that. Now, since then, there's been a lot more detailed research and papers written about this, and they're still being written about this. I pulled one just to give you a flavor of what the research says these days, because there's too many of these papers, honestly. So we're going to link to this in the show notes. It's called Spending Trajectories After Age 65 by Michael D. Hurd and Susan R. Wetter. And it was sponsored by Insight Investment and the RAND Corporation. And these two authors have written a number of papers on this and done a bunch of research and they cite to other research that they and others have done. This was written at the end of 2022. But they were looking at these research questions. First, how does total household spending adjusted for inflation evolve after age 65 as observed in longitudinal data? Second, how do spending trajectories after age 65 vary by marital status, sex, and wealth as observed near retirement? And third, under what circumstances are the observed spending trajectories a useful guide for financial planning in retirement? And here are the key findings. The first one is that real spending declined for both single and coupled households after age 65 at annual rates of about 1.7% and 2.4% respectively. So what that means is that retirees are spending even less than the Blanchett research suggests and that a better assumption to make in the aggregate would be CPI minus 2% as an inflation or an inflator when you're talking about the gross expenses of a retiree expected to go forward over time. That's what real spending means here. Next key finding, real spending declined for all initial wealth quartiles, although with some modest variation. And that answers your question as to who does this apply to, It basically applies to everybody. That's the fact, Jack. That's the fact, Jack. Next key finding. The fact that spending declines broadly, including among those in the highest wealth quartile, suggests that the decline is not related to economic position. In the next finding, the view that the decline in spending is not related to economic position is supported by an analysis of budget shares. the fraction of total spending devoted to subcategories of spending. And the last key finding, the budget shares for gifts and donations increases with age, which suggests that economic position on average does not deteriorate with age even as spending declines. Okay, what these findings are saying is that people are in fact spending less money in retirement, regardless of their wealth and that the fact that they're able to make more gifts and donations as they age suggests that their personal expenses are even less. So this is very strong data as to this conclusion. It's much stronger even than the original retirement spending smile research and data. All right, now we move on to the recommendations. And what I'm reading here is just a summary of this paper. It's actually 40 pages long when you include the appendices. First recommendation, financial planning for retirement should begin with determining spending requirements over the course of the household's retirement years. Well, I think that one's pretty uncontroversial. I would add to it that you should start with what you're spending right now and do it in a granular fashion and then work from there. Second recommendation, In determining those spending needs, households, financial planners advising them, and policymakers should not rely on the common assumption that real spending will be constant or even increase. Let me read that again. You as a household, you as a financial planner, and you as a policymaker should not rely on the common assumption that real spending will be constant or even increase. assumption that real spending will be constant or even increase. Those assumptions about increasing inflation are wrong. Wrong! And if you're doing it to be, quote, conservative, you are doing it wrong. Wrong! And your financial planner is probably doing it wrong. Wrong! And why is it wrong? Because, as this goes on to say, this is not supported by estimates of spending trajectories based on household level spending data. The data does not support that assumption. Right? Wrong. So if you're going to use data and research properly, you should not be assuming that your expenses will go up by the standard rate of inflation. That is wrong. Third recommendation, instead households, financial advisors, and policymakers should use the observed rates of spending change to help determine adequate savings rates during the working life and affordable spending levels during retirement. Now what does that mean and how does that translate into safe withdrawal rates and what we're talking about here? The bottom line is you probably do not need to save as much money as people are telling you. And the reason you don't need to save as much money is because your safe withdrawal rate can be higher. And the reason that your safe withdrawal rate can be higher is because your lifestyle is not likely to inflate at the rate of CPI inflation, which is the baseline assumption that is still made by people who do not want to acknowledge the real data. You can't handle the truth. Now, that was a fine assumption for Bill Bengen to make in 1994 when there wasn't any research and there wasn't any data. But we ought to have learned something in 30 years that you don't go around using bad assumptions that do not correspond with the data when you are doing your retirement planning. And you do not use bad assumptions and then say they're conservative and that's why you're using them. Just stop. If you put bad assumptions about inflation into any calculator that compounds you will get garbage out of that calculator.

Mostly Voices [26:55]

There was this sound like a garbage truck dropped

Mostly Uncle Frank [27:00]

off the Empire State Building. And I see this behavior over and over again, both from amateurs and from financial planners who do not understand how their calculator works. They understand how to put numbers in it and get numbers out and and present them in a nice way, but they do stupid things like adding CPI inflation to the expense side of their planning and then using some other metric that does not add inflation in to the projected growth of investment side of their planning. And this is why so many planners are ending up with clients that die at their highest net worth.

Mostly Voices [27:43]

Death stalks you at every turn.

Mostly Uncle Frank [27:47]

Because the plans were really crappy to begin with. And if they're an AUM based advisor, as far as fees are concerned, it's to their advantage to do this kind of overly conservative, unsupported by the data kind of planning.

Mostly Voices [28:04]

A mouse roars reaches a crude and starts to drink your milkshake.

Mostly Uncle Frank [28:13]

So I thought doing the research to answer this question was a real eye-opener because I knew that these assumptions were bad. I just didn't know how bad they actually were. They're much worse in terms of planning than I thought they were.

Mostly Voices [28:31]

I drink your milkshake. I drink it up.

Mostly Uncle Frank [28:39]

This does make a nice stick, though, to beat the financial services industry with. And I always like to have more of those kind of sticks around.

Mostly Voices [28:46]

You are the bouncers. I am the cooler. All you have to do is watch my back and each other's. Take out the trash.

Mostly Uncle Frank [28:57]

Our own experience is actually quite consistent with this, that our expenses have dropped over the past three years. of early retirement. And ours have actually dropped in nominal terms as well as inflation-adjusted terms, which only just reconfirms to me that what we see a lot in planning world, particularly using these retirement calculators, is just bad planning.

Mostly Voices [29:20]

Haha, you fool! you! fell victim to one of the classic blunders!

Mostly Uncle Frank [29:24]

I suppose what bugs me the most is that people don't know the math behind it and why it's so bad that if you make a small adjustment in something that you compound in either direction, such as a 1% variation, you compound that over a decade or three and all you're gonna get is garbage out of it. Not gonna do it.

Mostly Voices [29:48]

Wouldn't be prudent at this juncture.

Mostly Uncle Frank [29:52]

So now that we have the research, will people actually use it? I doubt it. That's not how the financial services industry works. That's not how do-it-yourself finance works. Everything is always about 10 years behind. And wallowing in groupthink and what some guru said 10 years ago and so on and so forth. And that is actually a good example of the crowd behavior we were talking about in answer to the first question. Because that's what crowds often do. They get things wrong and then go off and keep compounding the error until the idea or crowd collapses. Anyway, that was just one paper about this that's been written recently and there are many, many more others if you're interested in looking at more research and more data, some of which is referred to directly in this paper itself. Which leads me to my final observation is often when confronted with new research and data about something like this that contradicts what somebody's been doing for some period of time, the reaction is to cause some cognitive dissonance and to find reasons not to accept the new information and incorporate it into one's planning. That is also kind of a human cognitive defect, to find reasons not to accept the new information because you You don't want to admit that your prior information and practices are no longer best practices, but that does get to the foolish consistency, which is the hobgoblin of little minds, that being consistent with past practice is more important than knowing better, learning better, and doing better. Hopefully, if you're listening to this podcast, you will not fall into those cognitive traps.

Mostly Voices [31:42]

It's a trap!

Mostly Uncle Frank [31:46]

But watch for those who do because usually what happens is first they'll say, well, I'm not aware of any such research or data. Well, yeah, that's because you don't want to look and don't want to know. And then when you confront them with the research and data, they say things like, well, you know, personal finance is really personal, so I could just keep doing what I want to do and feel good about it, right? And the answer is you can do whatever you want to do with your own money, but that doesn't make it good, it doesn't make it right, and it doesn't make it a best practice. Personal finance is first and foremost finance. It's math. And it doesn't care about your feelings or your foolish consistencies. So don't fall into those traps and recognize when you're talking to somebody whether they are in that kind of trap because A lot of people are. They just are. That's human nature. It's a trap.

Mostly Voices [32:41]

It's a trap. It's a trap. It's a trap. Thank you for the topic and thank you for your email. Oh, yeah. Oh, yeah. Step into a slim Jim. Last off. Last off, an email from Jim. Jim Kirk, actually. Hey, Jim, baby. I see you brought up reinforcements. Well, I'm waiting for you, Jimmy boy.

Mostly Mary [33:25]

And Jim Kirk writes, Hi, Frank. Have you seen the newest article put out by Tyler at Portfolio Charts about global safe withdrawal? What's your take on it? Thanks, Jim.

Mostly Uncle Frank [33:39]

Well, yes, Jim, we actually just talked about this in our last podcast, episode 335. It is an excellent article. I won't repeat everything I said in that last podcast because you can just go listen to it if you haven't already. I will make one observation. One of the conclusions from this new research that Tyler has done is that a substantial allocation to gold in your portfolio around 30% in a lot of cases tends to increase the safe withdrawal rate. But the other observation he made or another observation he made was that the absolute worst kind of portfolio to hold of all the ones he tested is one that would be 100% gold. I thought that was very interesting, but it does confirm what we call the Holy Grail Principle, that in order to get the best results, you have to be using combinations of uncorrelated assets, diversified assets, and figure out what are the best combinations of those things, because just picking one thing and trying to ride it is not taking advantage of the Holy Grail Principle or Diversification and what you can get out of it. There is no one magic investment and just because an investment is bad on its own does not mean that it does not have a useful place in a diversified portfolio. I will link to that article again in the show notes because I do think it is very much worth reading, particularly if you are in a country outside the United States and investing from that perspective.

Mostly Voices [35:19]

You never could find your head with both hands, like it used to be, Jimmy, remember? I've got the edge, I'm still 20 years old, look at you, you're an old man. But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frank@riskparityradio.

Mostly Uncle Frank [35:40]

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 a follow or review some stars. That would be great. Okay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Mary [36:30]

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.