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! And the basic foundational episodes are episodes 1, 3, 5, 7, and 9. Some of our listeners, including Karen and Chris, have identified additional episodes that you may consider foundational. And those are episodes 12, 14, 16, 19, 21, 56, 82, and 184. And you probably should check those out too because we have the finest podcast audience available.

Mostly Mary [1:27]

Top drawer, really top drawer.

Mostly Uncle Frank [1:31]

Along with a host named after a hot dog. Lighten up, Francis. But now onward, episode 338. Today on Risk Parity Radio, we're just going to be answering some more of your questions, your good questions from your emails. But before we get to that, just one little announcement. I recently appeared as a guest on the Security Analysis Podcast run by the Value Stock Geek, which came out today, today being May 1st, 2024. And it was a wide-ranging conversation about all sorts of interesting things.

Mostly Voices [2:13]

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

Mostly Uncle Frank [2:17]

But I'll link to it in the show notes and let you check it out. As you know, we do not have any guests on this podcast.

Mostly Voices [2:24]

Let's face it, you can't talk them out of anything.

Mostly Uncle Frank [2:28]

Mostly because the host is too lazy and incompetent to get that going. I just stare at my desk, but it looks like I'm working. But I do enjoy going on other podcasts occasionally and talking to people. I think I'll actually be on the Choose FI podcast coming up sometime in June or maybe July. We just recorded that one recently with my good buddy Brad Barrett, the nicest guy of Phi.

Mostly Voices [2:54]

Oh, I'm so happy, hold me. And that was another wide-ranging conversation. You are talking about the nonsensical ravings of a lunatic mind.

Mostly Uncle Frank [3:06]

But you'll have to wait for it because they actually have professional standards over there.

Mostly Voices [3:10]

Don't be saucy with me Bernaise. But now without further ado, Here I go once again with the email.

Mostly Uncle Frank [3:17]

And first off, we have an email from Kimbrough in Anchorage, Alaska.

Mostly Voices [3:29]

Mailed the letter off to Dallas, but her reply came from Anchorage, she said, Hey girl, it's about time you wrote.

Mostly Mary [3:55]

It's been over two years now, my old friend, take me back to the days of the foreign Hello, and thank you so much for all you do. Wow, my supervisor at work at a fish hatchery, boy, is it a fun job. Introduce me to your podcast. I am thrilled to know you and to learn so much from your kindly sharing of knowledge. As I am reworking the investment accounts I inherited from a loving father who started them for me when I was a young child, I'm now 44. And as I learn more of what to do with all of that, plus my job's retirement accounts, thanks to your sample portfolios and advice from other FI folks, I have so many questions. So for now, why is there such a big difference in expense ratios of TMF versus TLT? And with Treasuries being down at a low right now, should I invest 3 to 5% of the portfolios into those, and which one? Or should I put that money elsewhere? Thank you again, Kimbro and Anchorage, Alaska. You know, it's interesting.

Mostly Uncle Frank [4:51]

I have a number of listeners with unusual professions. Dr. Frankenstein. From fish hatcheries to dog trainers.

Mostly Voices [5:08]

A bloodhound not only has a great nose, but he also they can talk. And he's. So when he's doing that, he's talking. He's saying, would you do? Would you do? Would you do? Would you do? And he's saying, I'm ready. That's when he. You know, he's ready for show. Because he says, I'm ready. I'm pretty. I'm ready. See, that. Dad, now he's ready. What you point? Was. You should know what I mean. He says, I'm ready.

Mostly Uncle Frank [5:36]

I've walked and I'm ready. Have a good night's sleep. And then we'll get going. And it'll be Showtime for you, right? To arborists. I speak for the trees. Let them grow. Let them grow. In addition to the run-of-the-mill doctors and engineers. Hearts and kidneys are Tinker Toys. And I'm not sure whether that says something about our listeners or says something about me. Do not ask them for mercy. But maybe someday I'll tell you what it was like to work in a slaughterhouse. and part of my misspent youth. Now getting to your question, the reason there are a big difference in expense ratios between TMF and TLT is that TLT is an ordinary ETF that just invests in long-term treasury bonds and is kind of the standard for that asset class. TMF is a completely different animal in that it is a leveraged fund. So it's not only got an investment in long-term treasury bonds, it's also got some swaps contracts and futures contracts to goose up the returns or losses and volatility of that fund to make it behave as if it were a three times TLT investment. So unless you are running some kind of experimental or leveraged kind of portfolio, you would not be using TMF.

Mostly Voices [7:03]

Forget about it.

Mostly Uncle Frank [7:06]

But there are some other options to TLT. One is a cheaper option that's virtually the same thing from Vanguard called VGLT. Schwab also has a similar ETF called SCHQ. But then if you're looking for something with a little bit more potential, if you will, that behaves like a leveraged version of TLT, you can look to what are known as the zeros or strips ETFs. And those are EDV from Vanguard, which is the oldest one. Then there's another one called ZROZ and another one called GOVZ. And all of those tend to behave as if they were about 1.5 times the returns and volatility of a fund like TLT. and they all have pretty low expense ratios and so are a viable option if you're looking for something like TLT that has more oomph than TLT, if you will. Of those three, I actually like ZROZ and GOVZ a little bit better than EDV. EDV is the Vanguard one and is a slightly lower expense ratio, but I've found that it has some weird properties and weird distributions in December sometimes. And also does not track the same index as the other two. And so the other two do adhere more to that kind of 1.5 times ratio to something like TLT than EDV does. Now, whether you should buy this at all or not is another question. You could ask yourself questions. You use the dirty words I see in many questions about investments. And those dirty words are right now, right now, or in the current climate or something like that.

Mostly Voices [8:56]

Forget about it.

Mostly Uncle Frank [9:01]

Because those kinds of questions imply a desire to speculate or use a crystal ball to figure out what's the best thing to invest in today with the hope that you are going to make a profit in the short term. A crystal ball can help you. It can guide you. And since we're interested in the long term here, that kind of investing is not a useful process for us.

Mostly Mary [9:26]

Now you can also use the ball to connect to the spirit world.

Mostly Uncle Frank [9:31]

Now these kind of funds do make a good component though of a well diversified portfolio. And the reason they do is that they are the things that perform well in recessions. like in 2008 or 2020 or the very early 2000s. And so you hold them to be a diversifier from stocks in those circumstances when stocks are likely to decline up to 50%. And if you've held them, you know that they are quite volatile, which is actually advantageous in a well diversified portfolio that you are rebalancing periodically. because it gives you the opportunity to buy something low and sell it high. And so since interest rates have been going up and the value of these has been going down in the past couple years here, we will be buying more of them when we rebalance. So gold has been doing really well this year and when we do the rebalancing in the portfolios in July, which is just our arbitrary date, we will be selling gold and buying more bonds. and it's that kind of rebalancing that can improve the overall returns of a portfolio long term. Now you seem to have an interesting situation in that you've got some accounts that you've inherited and then some other things floating around. So it's unclear to me how this investment is going to fit in with the rest of your investments, but that's how you want to be thinking about it. Because these kinds of funds are really not very good investments on their own. due to the volatility in them. They are more something like gold that you add to a portfolio to make it better. I also don't know whether you need to get more growth out of your portfolio or whether it is in a situation where you just need to preserve it and let it grow some. Just thinking about my conversation with the Value Stock Geek, what he does is that he's got a risk parity style portfolio or a good bulk of his assets, which is the weird portfolio on portfolio charts if you want to check that out. But then he also spends a lot of time actually picking value stocks and analyzing stocks. And that is the risk part of his portfolio, if you will. And that is actually a very common and time-worn strategy that is also known as the core and explore strategy. where you put most of your money in something safe and reliable, and then you have some of it that you're willing to speculate with and take more risks and chances with. And that's a perfectly viable option for a lot of people. But you say you have so many questions, well, you can keep sending them in and we will put them in the queue and get to them as we go. Hope you're enjoying hatching those fish. And thank you for your email.

Mostly Voices [12:30]

Hey, Shell, you know it's kind of funny. Texas always seems so big, but you know you're in the largest state of the union when you're anchored down in Anchorage, Alaska. Anchored down in Anchorage, Anchored down in Anchorage.

Mostly Uncle Frank [13:11]

Second off. Second off, we have an email from visitor5666 from Squamish, British Columbia.

Mostly Voices [13:21]

Good day. How's it going? I'm Bob McKenzie. It's my brother Doug.

Mostly Uncle Frank [13:33]

How's it going, age?

Mostly Mary [13:37]

And Visitor 5666 writes：In episode 334 and other episodes, you talk about your 3-1-1 flexible withdrawal plan. Can you please expand on your criteria to determine when to withdraw 3% or 4% or 5%? Thanks so much for your podcast.

Mostly Uncle Frank [13:51]

Well, it's a very good question now, isn't it?

Mostly Voices [13:54]

Yes.

Mostly Uncle Frank [13:58]

Just to get everybody on the same page here, what we're talking about is the way I tend to look at withdrawing our retirement assets to match our expenses. And so 3% I label as the keep the lights on expenses, another 1% goes to comfort, and the remaining 1% goes to extravagances. And the reason I came up with this and the reason everybody has to come up with something like this or some version of this is that when you're talking about theoretical 4% rules or something like that, you're not actually talking about any particular expenses. And as a practical matter, that's really not the way people live. People in fact have specific expenses that their life costs that your retirement assets need to cover. and they don't sort of neatly fit in these percentage boxes. So there are various approaches that financial advisors will take to this problem of matching your retirement assets with your retirement expenses. This is often how annuity products are sold, basically using annuity products and Social Security to cover some kind of baseline expenses. and you hear lots of cutesy names for your baseline expenses that might be minimum dignity floor, minimum dignity adult diaper, pie cakes, bucket things, and a lot of that actually does lead to inefficiencies if you're not careful because if you let that principle drive your planning, it requires you to plan out in excruciating detail what you think your expenses are in each one of these specific categories and then match specific dollars to them. It sounds easy in theory. It's easy for the next few years. It's not easy when you're talking about a 30-year retirement because you really don't know what you're going to be spending in 20 years. all you know is it's probably going to be less than what you're spending now if you're an ordinary retiree, at least in real dollars, because your lifestyle is unlikely to inflate at the same rate as the CPI. And we just recently talked about that at some length and went over some academic papers in episode 336. So for example, I see some kinds of ridiculous planning involving budgeting a new car every five years or something like that. That may sound good for the first five years or 10 years, but you're probably not going to be doing that 20 years hence. So a lot of these numbers I see financial planners using are just kind of made up things. And instead of locking those things down, it would be simply better to come up with an amount of money that you are going to spend on extravagances or some other discretionary expenditures because those are likely to change year to year and over the course of your life. The other bad planning thing I see frequently now, particularly on YouTube videos, is financial planners adding inflation adjustments to the expense side of things, but then using a real return on the investment side of things, essentially comparing apples and oranges. And that's just a garbage way to use a calculator and a garbage way to plan. Wrong! Wrong! Wrong! Right? Wrong! All that really does is free up more money to pay to the financial advisor.

Mostly Voices [17:45]

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

Mostly Uncle Frank [17:52]

So be wary of plans that seem too cute and too slick. and too much wrapped up in a box with a bow around them.

Mostly Voices [18:00]

Always be closing.

Mostly Uncle Frank [18:04]

Because life's a little bit messier than that and you want to be flexible.

Mostly Voices [18:08]

Am I right or am I right or am I right? Right, right, right. But I digress. Watch out for that first step. It's a doozy.

Mostly Uncle Frank [18:20]

So when I was considering this, I did not want to lock ourselves into some kind of labeling scheme of planning involving a lot of illiquid products. So I basically knew two things. One was that I wanted to be spending five percent of our portfolio, and I do believe that is a conservative amount to spend if you are using a good portfolio for retirement spending. That's what I'm talking about. But then I also wanted to think about, well, how does that match up with our actual expenses? And so we took out our actual expenses and looked at them. And what you typically see, at least for people who are good at saving, is that half of their expenses are things that are reoccurring and they have to keep up with, like taxes and insurance and food and the basics, if you will. And then about half of it seems to be other stuff. which you could live without if you had to, although some of it would be relatively unpleasant or undesirable. So when I broke this down further, it seemed to break down pretty well into this 3-1-1 spending plan matching up the desired spending level with the actual expenses. That about 3% of our expenses are things that we have to spend money on. There are baseline living expenses, or keep the lights on expenses. Or you can give them any other cutesy label you'd like to give them.

Mostly Voices [19:58]

Good ship, lolly pop, sweet trip to the candy shop, where fun, fun, fun, which by the way, I think is all marketing. and no substance. A, B, C, A, always B, B, C, closing, always be closing.

Mostly Uncle Frank [20:20]

You should always be very suspicious of cutesy labels in financial planning. You need somebody watching your back at all times. Which then led me to think about, well, how do our other expenses seem to break down? And when you look at your Discretionary expenses, which you could call the whole category just discretionary if you wanted to. There are things that you regularly spend money on that you'd like to keep doing, and they include things like getting people to clean your house or mow your lawn or your gym membership or some other membership or eating out expenses. These occur with some regularity is their main characteristic. and they're usually not by themselves extremely large expenses. They can be in the aggregate. But looking at the way ours panned out, it seemed to be about 1% of our spending was devoted to those sorts of things. And so I call those the comfort expenses because they make your life more comfortable. But then there's another category of discretionary expenses that are things that do not occur repeatedly, and they're things like big vacation expenses, or renovating part of a house that doesn't actually need to be fixed, or paying for part of a wedding or some kind of family celebration. All of these I put in a category which I call extravagances, because they do not necessarily need to occur in any given year, although hopefully you're having a steady stream of such things over the course of your life, because otherwise you're probably not spending enough money. In which case, I would recommend you start thinking about charitable contributions, increasing those, or in distributing your wealth to your offspring or other people that are going to get it anyway. So it seemed to me this was a good flexible way of budgeting with a portfolio that you're managing because it doesn't lock you in to very specific rules for your spending, portfolio allocations, or anything like that. What you're actually spending on is going to vary from year to year. And if you had some sort of emergency that caused you to have to replace a car or some roof or some other thing that was an unexpected large expense, that could be the extravagance for the year. The idea here overall is to maximize flexibility. in addition to maximizing spending itself. So in terms of your question, can you please expand on your criteria to determine when to withdraw 3% or 4% or 5%? I would say my goal is to withdraw 5% every year and maybe a little more some years if we have to. But how that gets allocated goes on this 3-1-1 kind of plan. Because yes, if there was some kind of catastrophe, we could dial it all back and just spend 3% if we had to. By that time we'd probably be downsizing the house or doing something else that would reduce our baseline living expenses significantly. But that's the general idea here. I think this also meshes pretty well with the 4% rule used as a rule of thumb for determining how much you need to accumulate because that actually will give you more than you need to implement this plan. At least it will be more than you need if you do not succumb to large buckets of cash plans. You're not paying a AUM advisor 1% of your assets every year. I drink your milkshake.

Mostly Voices [24:10]

I drink it up.

Mostly Uncle Frank [24:14]

or you're not committing to some kind of inflexible illiquid plan. And also if you're not treating your discretionary expenses as mandatory. Because the goal here is to be able to spend the most money or more of your money in retirement and hopefully do a lot of that early on when you're capable and more interested in doing more things than you will when you're in your 80s. because I can see expanding this out to 6% or even 7% as you get much older, if you haven't been spending the money already in particular. Now, this may sound reasonable, but I think it's in stark contrast to what I actually see most personal finance gurus actually doing in their retirement, and most of them are actually grossly underspending their wealth to the tune of less than 3%. or close to 3%. All that really does is pretty much guarantee you're going to be dying at your highest net worth. And if that's your goal, that's fine. But if it's not your goal, then you should probably modify your behavior to match what you say is your actual goal.

Mostly Voices [25:22]

That is the straight stuff, O Funk Master.

Mostly Uncle Frank [25:26]

But I believe that's enough on this for one episode. And so thank you for your email. Last off, we have an email from visitor 7703 from Denver, Colorado.

Mostly Voices [25:52]

There are those who will say that the economy has forsaken us. Nay, you have forsaken the economy. And now you know the economy's wrath. Oh, thous canst shop in a sporting goods store, but knowest thou that the economy will take away thy Broncos cap from thine head. And visitor 7703 writes, My father's retirement funds have been sitting in a 2% interest account apparently for years.

Mostly Mary [26:22]

I want to invest this money wisely to maximize his finances. I like the golden butterfly approach, but wonder about the 20% in VIOV versus adding some of that to VTI instead. Well, I'm sorry your father's retirement funds have been sitting in a 2% interest account for years on end. That's not an improvement.

Mostly Uncle Frank [26:44]

This seems to be a big problem with many retirees that they are essentially using short-term instruments for long-term investing. So whenever you see somebody that's piling up a bunch of CDs and ladders and high yield savings accounts and their money just is sitting there or being rolled over into the same thing over and over again. If you have money like that, the idea is you're going to be spending it in the near term. It's a short-term investment. If you're actually holding something for the long term, you actually do want to invest it in a longer term investment or portfolio. Because cash hoarding in buckets or ladders or however you want to describe it is just not a good practice financially. Fat, drunk, and stupid is no way to go through life, son. And if you're doing it because it makes you feel good, I suggest you buy a simple annuity that would cover the same amount because when you're in your 70s in particular, that is going to be your better choice than hoarding a bunch of cash in these kind of short-term instruments. That's the fact, Jack. That's the fact, Jack. You'll get better returns and then have other money that is just left over that you can do whatever you want with and you won't be scared anymore. Now, your question about whether you should modify the Golden Butterfly to take the 20% in VIOV and put that towards VTI instead. The answer is no in this circumstance because of the diversification principle you are applying here. And this seems to be a baseline principle that works well in almost any kind of portfolio, from accumulation to decumulation, that the stock portion, if you're looking for a rule of thumb, you want half of that in growth funds and half of that in value tilted funds. and in this portfolio, the growth tilted portion of it is the VTI and the value tilted portion of it is the VIoV. Now, that doesn't mean you necessarily need to pick those two funds. Remember, these are sample portfolios, but whatever you're picking to go alongside the VTI should be a value tilted fund or a set of value tilted funds. And so if you're not going to use VIoV, you could use the Vanguard Large Cap Value, which I believe is VTV, to make the portfolio even more conservative. Or you could go with one of the newer Avantis funds, because those not only have the value tilt, but they also add a quality factor to it. And one of those is AVUV. I will link to Paul Merriman's best in class ETFs in the show notes. And he actually had a recent podcast where the fellow that does the research for that, and I'm forgetting his name right now, talked about how he did it using Portfolio Visualizer, by the way, to really determine out of a bunch of value tilted funds for each category, which ones seem to be the best. I thought it was an interesting description of a process, but it did give me some confidence that that list that they put together there should be given some weight and wasn't something that was just done off the cuff. So you do have many options here, but I think the principle you want to adhere to is that half of your stock portion of this should be in growth stocks, and that includes things like the S&P 500 or VTI. because that's where they fall when you look at their breakdown, and then half as value-tilted stocks or funds. After that, you have a lot of options. But I'm glad you'll be doing something more sensible with this money than letting it languish in cash and get eroded by inflation, and that you're not paying anybody else to do it either. Yeah, baby, yeah! So all good on you and thank you for your email. But now I see our signal is beginning to fade. Just one announcement. We will not be having a podcast this weekend. We're going on a hiatus. So hopefully I'll be back mid next week. We'll be doing monthly distributions today, which will be reported on the website, including selling some Bitcoin in one of our portfolios. to fund that distribution. Excitement abounds.

Mostly Voices [31:24]

As they shake hands with the devil, when they scream through the burning gates of hell, we'll sell you the whole seat, but you'll only need the edge. Be there. But in the meantime, if you have comments or questions for me, please send them to frank@riskparityradio.

Mostly Uncle Frank [31:37]

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 follow, or a review. That would be great. Mmmkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off. You have brought the economy's vengeance upon yourselves.

Mostly Mary [32:14]

What can we do, Randy?

Mostly Voices [32:21]

We must all wear sheets instead of buying clothes that need detergent. Instead of cars that take gasoline, we can get around on llamas from Drake's farm. Instead of video games that take batteries and software, our kids will play with squirrels. We must let the economy know that we are capable of respecting it. No more needless spending. The economy is our shepherd. We shall not want. The Risk Parity Radio Show is hosted by Frank Vasquez.

Mostly Mary [32:54]

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.