Speaker 2 [0:01]

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.

Speaker 4 [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.

Speaker 5 [0:37]

Thank you, Mary, and welcome to Risk Parity Radio. If you have just stumbled in here, you will find that this podcast is kind of like a dive bar of personal finance and do-it-yourself investing.

Speaker 1 [0:52]

Expect the unexpected.

Speaker 5 [0:55]

It's a relatively small place. It's just me and Mary in here and we only have a few mismatched bar stools and some easy chairs. We have no sponsors, we have no guests and we have no expansion plans.

Speaker 2 [1:10]

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

Speaker 5 [1:14]

So please enjoy our mostly cold beer served in cans, and our coffee served in old chipped and cracked mugs, along with what our little free library has to offer. But now onward, episode 369. 369. Reminding us all that three is a magic number, Three is a magic number. Nothing like a little schoolhouse rock to brighten your day 369-1215-1821-2427-30.

Speaker 6 [2:08]

369-1215-1821-2427-30.

Speaker 5 [2:18]

But now let us get to the usual business at hand.

Speaker 1 [2:21]

Here I go once again with the email.

Speaker 5 [2:25]

And First off, business at hand. Here I go once again with the email. And first off, first off, we have an email from Frank. Don't you ever touch me again?

Speaker 4 [2:37]

And Frank writes I just rolled over my 401k to an IRA. Only 12% of our assets are in the IRA and the rest is in a brokerage account. We're in the 32% tax bracket. As a result of the rollover, we have 19% in cash and 12% in bonds. I am trying to get to about 30% bonds. Should I buy treasuries in the IRA or municipal bonds in the brokerage account? If I do treasuries in the IRA, the IRA would be all bonds. Do you recommend intermediate or long-term treasuries? Slash municipal bonds. Thank you for all you do for us less intelligent investors.

Speaker 2 [3:17]

You're that smart. Let me put it this way have you ever heard of Plato, aristotle, socrates? Yes, morons, really.

Speaker 5 [3:27]

Well, I'd like to be able to answer your question, but I'm not sure that I can.

Speaker 1 [3:31]

You can't handle the dogs and cats living together.

Speaker 5 [3:35]

Because there are a few more factors involved besides your tax bracket, namely, where are you in the great scheme of things? Are you about to retire? Are you going to live off this portfolio? Are you close to 59 and a half, or do you have another plan to get money out of the IRA? Maybe you don't need to at this point. And then, are you in the 32% tax bracket because of your ordinary income, or are you in the 32% tax bracket based on the income coming from your investments, which would be a large pool of investments?

Speaker 1 [4:10]

Yes.

Speaker 5 [4:11]

All that being said, since you only have 12% of your assets in retirement accounts, I would definitely fill that all up with bonds, so that entire 12% is going to be bonds. Treasury bonds are usually the best choice if the rest of your portfolio is stock-based, because they are the most diversified from stocks. And that's usually why you are holding them in a stock-based portfolio, because if you wanted higher returns, you would just hold more stocks. You don't use bonds in a mostly stock portfolio to generate returns. It doesn't make any sense. Forget about it. But you say you want to get to 30% in bonds and then you're wondering about whether that should be intermediate-duration treasuries, long-term treasuries or municipal bonds, which could be of multiple durations, I would suppose.

Speaker 5 [5:01]

When I'm thinking about bonds duration-wise, I usually like to think about them in terms of their relationship, their relationship as to volatility. And what I mean by that is, if the interest rate prevailing interest rate goes up or down by 1%, how much is this bond fund likely to move up or down? And what you learn from that is that long-term treasury bonds have about twice the volatility as intermediate-term treasury bonds. So if the intermediate treasury bonds go up or down in value by 5%, it's likely that the long-term bonds are going to move by 10%. Now that's both good and bad, but it does play into what your overall allocation is going to be to bonds. Putting 30% in long-term treasury bonds would be a very large allocation to that, because long-term treasury bonds also have a similar volatility characteristic in magnitude as to the stock market. Those are similar volatilities. So I would say you probably do not want 30% in long-term treasury bonds, because if you held 15% in long-term treasury bonds it would have the same kind of effect in the portfolio that holding 30% in intermediate treasury bonds would have.

Speaker 5 [6:18]

Without knowing what's in the rest of your portfolio, I can't really advise you, because you need to be looking at the whole portfolio altogether and it does matter what the rest of your portfolio is, because obviously the rest of your portfolio is going to be more important than this part of it. I do have a creative solution for this, though. Given your small allocation to the IRA. To the IRA, you can go even further out on the duration curve, meaning more volatile than long-term treasury bonds, if you go out to strips funds, and there are three basic ones. One's called EDV, that's a Vanguard product. The other two are called GOVZ and ZROZ called GOVZ and ZROZ, and all three of those have the characteristic of being about one and a half times more volatile than long-term treasury bonds.

Speaker 5 [7:14]

So what I'm thinking you might look at is this Take that 12% and put it in one of those strips funds that will behave like it is 18% in long-term treasury bonds as far as your overall portfolio is concerned, at least over long periods of time, and then, after you've done that, you can probably just put a lesser allocation into the taxable side and maybe you do put that into municipal bonds. But again, that has more to do with what else is going on in your life in terms of this tax rate and whether you have any control over it than anything else. Because I think, even if you only have 12% in treasury bonds in the taxable side, in addition to this 12% you might put in a strips fund in the IRA. That doesn't seem to me that it's going to generate a whole lot of taxes just because it's not a very big part of the portfolio, but it depends on how big your overall portfolio is, I would suppose.

Speaker 4 [8:14]

A really big one here, which is huge.

Speaker 5 [8:19]

So maybe it's a question of leaving any municipal bonds now, but then when you stop having ordinary income from employment and your tax rate goes down, then you switch them to treasury bonds. That could work as well too. The other thing you might consider on the taxable side is an investment in a preferred shares fund like PFFV or PFF, as those are going to pay mostly qualified dividends and get taxed at the lower long-term capital gains tax rate and not the higher ordinary income rate. But again, that's also going to depend on what's in the rest of this portfolio. I would definitely cut down on your cash allocation of this 19% cash. If it's too much cash, keep that under 10%, so it's not dragging on the overall performance of the portfolio. I'm sorry I couldn't answer this question in a more complete way, but hopefully this helps some and thank you for your email.

Speaker 2 [9:17]

The name's Francis Sawyer, but everybody calls me psycho. Any of you guys call me francis and I'll kill you. You just made the list, buddy, and I don't like nobody touching my stuff, so just keep your meat hooks off. If I catch any of you guys in my stuff, I'll kill you lighten up Francis.

Speaker 5 [9:49]

Second off. Second off we have an email from John.

Speaker 4 [9:55]

Here's Johnny, and John writes Do you have a version of the podcast without the cringy funny inserts? Literally impossible to listen to.

Speaker 1 [10:08]

Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys? Forget about it.

Speaker 5 [10:16]

Well, john, the answer is no. I do not Forget about it and I do not plan on creating one, although I can show you how to create one in a minute here. This podcast was never intended to be a commercial production.

Speaker 1 [10:32]

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

Speaker 5 [10:37]

It's a retirement hobby for me, and so part of what is important to me that would not be important to somebody who's trying to build a massive audience is that a lot of my listeners are just friends and family. Don't ever take sides with anyone against the family again, and they are more interested, actually, in the cringy, funny aspects of this than they are in the actual content of it.

Speaker 2 [11:02]

Babies. Before we're done here, y'all be wearing gold-plated diapers.

Speaker 7 [11:09]

What does that mean?

Speaker 5 [11:15]

Never question Bruce Dickinson Roll it, and sometimes they ask me for particular clips or things that they might want to hear in this podcast, and so I indulge them in that.

Speaker 4 [11:23]

Here's one. Somebody didn't finish. Squidward smells Good Stop.

Speaker 2 [11:31]

Hmm, what's this?

Speaker 4 [11:32]

one Crabs is a. Huh, crabs is a.

Speaker 5 [11:40]

Most importantly to me, these clips also do attract the ears of my adult children.

Speaker 1 [11:47]

Here's how things work I order the food, you cook the food, then the customer gets the food. We do that for 40 years, and then we die.

Speaker 5 [11:58]

And so it is what it is, and I appreciate that some people just don't want to listen to it, and that's fine.

Speaker 1 [12:06]

Oh no, my young Jedi, you will find that it is you who are mistaken about a great many things.

Speaker 5 [12:25]

We have a very nice audience here of between 1,000 and 1,500 listeners.

Speaker 1 [12:29]

The best, Jerry the best.

Speaker 5 [12:32]

And that is more than enough for a retirement hobby.

Speaker 2 [12:35]

Top drawer, really top drawer.

Speaker 5 [12:39]

I also must say that, although this content seems new and different to people who have only been in the land of personal finance, nothing I say on this podcast is actually something that I invented. Everything I'm talking about are things that I've read about or drawn up from professional investors like the Ray Dalios and the Cliff Asnesses of the world, and now the Corey Hoffsteins, the Eric Crittendons, the people that run, simplify Asset Management or Resolve Asset Management. One thing you need to know about ordinary personal finance world is that it tends to be at least five to 10 years behind in terms of knowledge, best practices, ideas in investing, because it generally takes that long for more complex strategies or ideas to basically get translated or massaged into something that's more acceptable to large swaths of people in do-it-yourself investor land, and there is also an overemphasis on simplicity in personal finance. That is not always the right idea.

Speaker 6 [13:55]

Am.

Speaker 1 [13:55]

I right or am I right?

Speaker 6 [13:55]

or am I right, Right, right right.

Speaker 5 [13:58]

Simplicity is important, but it should not be the prevailing idea that governs how you run your personal finances. Things should be simple enough, but not so simple that they miss the boat or miss the diversification, or miss the Holy Grail principle.

Speaker 4 [14:17]

Everything should be made as simple as possible, but not simpler.

Speaker 5 [14:21]

So all I'm trying to do here is to translate modern best practices that professionals and others are following into things that do-it-yourself investors can apply themselves and that are simple enough to apply. I'm not a smart man. Now what are your alternatives for hearing something without the soundbites? Well, I just ran across this. Today, my friend, brad Barrett the nicest guy of Fi puts out a weekly newsletter where he mentioned that there is a new artificial intelligence tool put out by Google called Notebook, and this tool will create little miniature AI podcast out of content that you feed it. So you could give it some reports or something else, or even another podcast such as mine, and it will create a little miniature podcast which, oddly enough, sounds like my friends brad barrett and diana merriam talking to each other at least that's the way I heard it. So if you really wanted to take my podcast, you could grab them off of youtube, shove them into notebook and have it create a different podcast for you. That would be a more pleasant or palatable discussion than the one I offer.

Speaker 5 [15:45]

No one can stop me, and as an example of that, I ran podcast number 333, which is my rant about target date funds through this thing and created this alternative podcast which I am going to append right after I've finished answering this question. This clip is 22 minutes long, so if you don't want to listen to it, I suggest you forward this podcast about 22 minutes and you can skip it based on that. But I thought it was both informative and entertaining and it's probably the wave of the future that if you don't like the way something is presented, you can use an AI bot to put it into some other format, into a more palatable presentation Inconceivable. So hopefully you enjoy it and thank you for your email.

Speaker 3 [16:39]

Ever get the feeling like everyone's just looking for that, I don't know, like that easy button for their investments.

Speaker 7 [16:44]

Oh, absolutely Everyone wants that. Set it and forget it dream.

Speaker 3 [16:48]

Right. Well, today's deep dive is going to be a little bit of a reality check on that front, especially if you're someone who relies on those target date funds in your 401k.

Speaker 7 [16:58]

Yeah, Target date funds, TDFs as they're often called. They definitely have that hands-off appeal.

Speaker 3 [17:03]

Exactly, but our source today, frank Vasco, is from Risk Parity Radio. He does not hold back, he goes. Well, let's just say he goes full-on. Gordon Ramsay on these things.

Speaker 7 [17:13]

Yeah, frank's style is definitely passionate, to say the least, but that's kind of what makes this deep dive so interesting. Right? He really lays into some of the let's call them controversial aspects of TDFs.

Speaker 3 [17:24]

And just a reminder for our listeners while we're dissecting Frank's arguments, which get pretty spicy at times, remember our goal is to promote informed skepticism, not just blindly agree with everything he says 100% Critical thinking is key always. Okay, so target date funds they're supposed to be all about simplicity, right, hands-off rebalancing, all that jazz. But Frank's first point is that they're easy but not actually simple. What's the difference there, and why should we care?

Speaker 7 [17:53]

Okay, so imagine this Ordering takeout online. Super easy, right Click click, boom food's at your door.

Speaker 3 [18:00]

Dangerous territory for me, but yeah, I get it Super easy.

Speaker 7 [18:02]

But understanding how that app was actually coded, the network infrastructure behind it, the restaurant's inventory system, all of that. That's definitely not simple.

Speaker 3 [18:11]

Okay, I see where you're going with this.

Speaker 7 [18:12]

And that's kind of what Frank is saying about TDFs. They bundle all these different funds together, constantly shifting things around behind the scenes, and his argument is that this lack of transparency. It benefits the fund managers more than the actual investor.

Speaker 3 [18:25]

Hold on. That seems I don't know kind of sneaky Like. Are you saying these funds are designed to be misleading?

Speaker 7 [18:35]

Well, Frank might use a stronger word than misleading. He actually compares TDFs to some of those, shall we say, notoriously complex financial products out there, like whole life insurance, for example.

Speaker 3 [18:48]

OK, those are some fighting words for sure, but I see the comparison. These things can be so convoluted that it's almost impossible to figure out what's really going on under the hood.

Speaker 7 [18:52]

And that's Frank's whole point Just because something is easy to buy into doesn't mean it's transparent or even beneficial in the long run. Like those complex insurance products, they often have all sorts of hidden fees and clauses that can really trip people up, and he sees some parallels with how TDFs operate.

Speaker 3 [19:10]

Okay, so ease of use does not equal transparency, got it?

Speaker 7 [19:14]

Exactly, and one of the biggest points of contention with TDFs is this whole conservative glide path thing.

Speaker 3 [19:22]

Oh yeah, I've heard that term thrown around. It sounds kind of like I don't know an airplane landing or something Kind of Imagine like a playground slide.

Speaker 7 [19:28]

You know how it starts steep and then gradually gets flatter as you approach the bottom.

Speaker 3 [19:32]

Yeah, I can picture that.

Speaker 7 [19:33]

Well, that's essentially what a lot of TDFs do with your investments. As you get closer to retirement, they automatically shift your money from, say, stocks, which are generally considered riskier but have higher growth potential, into bonds, which are typically seen as more stable but might not grow as much.

Speaker 3 [19:50]

So less risk but also potentially less reward as you get closer to retirement. Exactly, and while that might sound reasonable on the surface, Because, theoretically, you don't want to be taking huge risks with your nest egg right before you retire.

Speaker 7 [20:03]

Right, but and this is Frank's big but he argues that this glide path thing it can actually seriously limit your growth potential, especially if you're a younger investor with a longer time horizon.

Speaker 3 [20:15]

Okay. So if you're decades away from retirement, you might actually be better off with a more aggressive investment strategy.

Speaker 7 [20:21]

That's Frank's argument and he's got some pretty compelling data to back it up. He cites this 2022 study that found TDFs could underperform. Get this by as much as 20 percent over a 50-year period.

Speaker 3 [20:34]

Whoa, 20 percent. Now that's a number that would make anyone pay attention, but is that like a worst-case scenario? Is Frank, maybe cherry, maybe cherry picking data here to make a point?

Speaker 7 [20:43]

That's a fair question. He actually cites a 2020 academic paper that was updated through 2022, so pretty recently and this paper basically backs up those numbers. They found that because many investors they just blindly follow the TDF's preset path.

Speaker 3 [20:59]

Right Set and forget it supposedly.

Speaker 7 [21:01]

Fund managers can sometimes get away with charging higher fees or even slipping in some, shall we say, less than stellar funds within the TDF itself.

Speaker 3 [21:11]

So it's like they're taking advantage of people's like inertia. That's kind of messed up if you think about it.

Speaker 7 [21:16]

Well, Frank would definitely say so.

Speaker 3 [21:18]

Well, hold on. I have to ask what about Vanguard? Everyone always talks about them like they're. You know, the good guys of the investing world, the investors champion. They have target date funds too, right.

Speaker 7 [21:27]

They do, and Frank has something to say about that too. He calls it the Vanguard fallacy.

Speaker 3 [21:32]

Oh, he loves his fallacies, doesn't?

Speaker 7 [21:33]

he. It's all part of his charm, right, but yeah, he basically argues that even if Vanguard's TDFs are, let's say, marginally better than some of the others out there maybe they have lower fees or a slightly better performance they still follow this whole glide path approach that he really takes issue with.

Speaker 3 [21:50]

So even Vanguard isn't safe from Frank's critique.

Speaker 7 [21:53]

Not even close. And you know he always likes to point out that most 401k plans they don't even offer Vanguard as an option.

Speaker 3 [22:00]

OK. So I feel like this is where a lot of listeners might be nodding their heads along but also feeling a little stuck. If we're saying target date funds are potentially a raw deal, what are we supposed to do instead? I've heard Frank mention index funds before. Is that what we're talking about here?

Speaker 7 [22:15]

You're definitely picking up what Frank is putting down. He is a huge advocate for index funds. In fact, he calls his whole investment philosophy the simple path to wealth, and it revolves around these things. But before we get into the nitty gritty of that, we should probably spend a little more time understanding why he's so against target date funds, like I'm talking, really dissecting his arguments.

Speaker 3 [22:38]

OK, I'm game, so break it down for me. What are some of the specific fallacies as he calls them that Frank sees with these TDFs? Give me the first one. What's he calling out?

Speaker 7 [22:48]

All right, so fallacy number one on Frank's hit list. He calls it magical thinking.

Speaker 3 [22:53]

Magical thinking. Okay, I think I'm already guilty of this one.

Speaker 7 [22:55]

It's this idea that, you know, by investing in a target date fund, you're basically buying into this like this magical solution for retirement. You know, like those hands off, algorithm driven funds, they're just going to like magically make everything OK in the end.

Speaker 3 [23:09]

Oh yeah, I've totally fallen for that. The allure of set it and forget it is strong.

Speaker 7 [23:13]

Oh, tell me about it. But Frank would say and this is where that tough love comes in. He'd say there's no such thing as autopilot when it comes to financial security. Love comes in, he'd say, there's no such thing as autopilot when it comes to financial security. Right, he argues that this whole magical thinking thing, it actually prevents people from like, from actually learning the basics of investing.

Speaker 3 [23:30]

You know how to assess their own risk tolerance, how to adjust their investments over time as their life changes, and that ultimately it keeps them financially dependent and dependent on those potentially high fee target date funds, which is, let's be honest, kind of what some parts of the financial industry want.

Speaker 7 [23:48]

You're catching on. It's a bit of a conflict of interest there.

Speaker 3 [23:51]

you could say OK, so magical thinking, check what's the next fallacy on Frank's list.

Speaker 7 [23:56]

He calls this one moving the goalposts.

Speaker 3 [23:59]

Moving the goalposts. All right, I'm intrigued. Lay it on me.

Speaker 7 [24:03]

So you'll hear some people, even some financial advisors, say things like well, you know, at least with the target date fund, people are doing something with their 401k. Right, it's better than nothing.

Speaker 3 [24:13]

Right, because, like if someone's totally clueless about investing, at least a target date fund is I don't know better than just letting their money sit in a low yield savings account.

Speaker 7 [24:23]

See, that's exactly the kind of thinking that Frank takes issue with. He's like why are we setting the bar so low? You know he firmly believes that if you can like I don't know if you can manage a budget if you can order takeout online, you can learn to pick a few simple index funds this whole better than nothing argument. It's like we're underestimating people's capability to learn and take control.

Speaker 3 [24:44]

Wow, yeah, I never thought about it like that. It's almost like I don't know like some people are like profiting off of, like people's perceived helplessness when it comes to finances.

Speaker 7 [24:55]

It's a bit of a bold statement, but that's Frank, for you.

Speaker 3 [24:58]

This is getting kind of deep man. Yeah, Okay. So we've got magical thinking, We've got moving the goalposts.

Speaker 7 [25:03]

Yeah.

Speaker 3 [25:04]

What's the last fallacy Frank calls out.

Speaker 7 [25:06]

The last one he calls the false dilemma.

Speaker 3 [25:08]

The false dilemma Okay what's that all about?

Speaker 7 [25:11]

So it's this idea that the only two options when it comes to investing are doing absolutely nothing, just letting your money sit there, or using a target date fund and Frank sees this as a way of like limiting people's choices.

Speaker 3 [25:36]

Right, it's like saying, hey, you either have to be totally passive or you have to, like, hire this expensive financial advisor, when in reality, there are way more options on the table. It's like they're presenting this overly simplistic choice when it comes to investing, when it's like, hello, it's your money.

Speaker 7 [25:42]

You should have more say in how it's managed Exactly, and Frank would argue that a lot of traditional financial advisors they actually benefit from keeping people in this TDF or bust mindset. Now, before we get into the nitty gritty of what Frank proposes as an alternative, I think it's only fair that we at least touch on some of the potential upsides of target date funds, even if just to play devil's advocate for a second.

Speaker 3 [26:04]

OK, so it's not all doom and gloom with these TDFs. There are some potential benefits.

Speaker 7 [26:08]

There are a few that even critics like Frank would acknowledge. I mean, the biggest one is probably for truly hands off investors, those who really truly just want to set it and forget it. Tdfs do offer that automatic rebalancing. As you get closer to retirement, you know, shifting from, say, mostly stocks to a more conservative mix of stocks and bonds, that whole conservative glide path thing.

Speaker 3 [26:32]

Right? Right, Because in theory, you want to be less exposed to the ups and downs of the stock market as you get closer to retirement.

Speaker 7 [26:39]

Exactly, and proponents of TD TDS would argue that this automatic glide path, it helps protect investors from themselves, so to speak, like it prevents them from making rash emotional decisions during market downturns because they're not the ones actively managing their portfolio. The fund does it for them.

Speaker 3 [26:57]

Okay, I can see that, and I imagine there's also the simplicity argument right For folks who are just completely overwhelmed by the thought of choosing individual investments. A target date fund makes that whole what to invest in decision a lot easier.

Speaker 7 [27:10]

Absolutely, and for someone just starting out that can be really appealing. But and this is a big but Frank would say that even these potential benefits, they're totally outweighed by the downsides. We've already talked about the lack of transparency, the potential for higher fees and, I think, most importantly for him, the way that target date funds can sometimes discourage people from becoming more financially literate and taking more ownership of their money.

Speaker 3 [27:35]

So it's like convenient in the short term, potentially detrimental in the long run.

Speaker 7 [27:40]

That's a good way to put it and that, my friend, is why Frank is so passionate about providing what he believes is a better way. Remember his simple path to wealth.

Speaker 3 [27:50]

OK, yeah, let's unpack that. What's this simple path, all about?

Speaker 7 [27:53]

So, at its core, it's about building a diversified portfolio using you guessed it low cost index funds.

Speaker 3 [28:00]

Index funds. Ok, I've heard that term thrown around a lot, but I got to be honest I'm still a little fuzzy on the details. What exactly is an index fund?

Speaker 7 [28:06]

So imagine, instead of like betting on one simple racehorse, you bet on, like the entire, kentucky Derby.

Speaker 3 [28:13]

Go big or go home.

Speaker 7 [28:16]

Right, exactly, that's kind of what an index fund does. It tracks a specific market index, so like a basket of stocks. You've probably heard of the S&P 500, for example.

Speaker 3 [28:23]

Yeah, yeah, that rings a bell.

Speaker 7 [28:24]

So that's an index. It's made up of 500 of the largest companies in the US stock market. So when you invest in an S&P 500 index fund, you're essentially buying a tiny piece of all 500 of those companies.

Speaker 3 [28:39]

Oh, so you're spreading your bets across hundreds of companies, which I'm guessing reduces your risk if any one company tanks.

Speaker 7 [28:45]

Exactly Built-in diversification. It's one of the biggest advantages of index funds. Plus and this is huge they are incredibly low cost. Remember how we talked about those sneaky fees hidden within some TDFs? Well, index funds are like the antidote to that.

Speaker 3 [28:59]

Lower fees are always music to my ears, but OK, are index funds like too simple Like? Are we missing out on potential gains by not I don't know, by not actively picking individual stocks or something that's a?

Speaker 7 [29:11]

super common concern. But, and this might surprise you, historically index funds have consistently outperformed those fancier actively managed funds, especially over the long term.

Speaker 3 [29:21]

Wait, are you serious? So I could potentially earn more by keeping it simple. Tell me more.

Speaker 7 [29:27]

That's the beauty of Frank's approach. It's not about like trying to outsmart the market or chase the latest hot stock tip or anything like that. It's about slow, steady, consistent growth over time. And he argues that for most investors, especially those who aren't trying to become like day traders, index funds are the most effective way to build wealth for retirement.

Speaker 3 [29:49]

So it's not about getting rich quick. It's about building that solid financial foundation for the long haul.

Speaker 7 [29:54]

You got it. Now, to be totally transparent, Frank's simple path. It does require a little more hands-on involvement compared to just dumping your money into a target date fund and forgetting about it. You're not about to tell me I have to become like a financial expert overnight, are you? No, no, no, no, Nothing like that. It's more about like understanding the basics, Like you know, like we talked about, choosing a few good index funds that align with your risk tolerance and then and this is key rebalancing your portfolio every now and then to make sure you're maintaining your desired asset allocation.

Speaker 3 [30:24]

Rebalancing. Ok, there's that word again. See, that's where I start to get intimidated. Break that down for me. What does rebalancing actually entail?

Speaker 7 [30:32]

okay, so it's honestly not as complicated as it sounds. Let's say, for example, you start with a portfolio that say 80% stocks and 20% bonds right, okay, 80-20 split got it over time, that allocation, it might drift a little bit, especially if, like, the stock market has a really good year or something. So rebalancing just means like selling some of your stock holdings and then buying more bonds to bring your portfolio back to that original 80-20 split that you decided on.

Speaker 3 [31:01]

So it's about maintaining balance, kind of like a financial checkup to make sure everything's still aligned.

Speaker 7 [31:05]

Exactly, and the best part is a lot of brokerage firms. They actually offer automatic rebalancing now, so you don't even have to lift a finger.

Speaker 3 [31:13]

Technology to the rescue once again. That makes it way less intimidating.

Speaker 7 [31:17]

Right, and I think this is really important, even though it requires a bit more involvement up front. The real beauty of Frank's simple path Not some preset formula or a fund manager's decisions. You're making informed choices based on your own research and your understanding of your financial goals.

Speaker 3 [31:39]

Yeah, I have to say, the more we delve into this simple past, the more appealing it sounds. It's not just about like picking investments. It's about like taking control and understanding how it all works and, honestly, not being afraid to ask questions.

Speaker 7 [31:53]

Exactly. It's about becoming financially literate, and that's something Frank is incredibly passionate about. Remember all those fallacies we talked about? They all really stem from a lack of financial literacy. He believes that when people understand the basics, when they're empowered with that knowledge, they're less likely to fall prey to these misleading narratives or rely on products that might not actually be in their best interest.

Speaker 3 [32:17]

See, this is why I love diving into these topics, because it's not just about like numbers and spreadsheets, you know. It's about like empowerment and knowledge and taking control of your future 100 percent.

Speaker 7 [32:29]

It's about taking ownership.

Speaker 3 [32:31]

OK, so we've talked about the fallacies of target date funds, we've explored this idea of the simple path using index funds. But I want to circle back to something you mentioned earlier about those other complex financial products that Frank kind of lumps TDFs in with. Ah yes, do you remember when he compared them to like whole life insurance and variable annuities?

Speaker 7 [32:53]

Oh yeah, he did not hold back with that comparison.

Speaker 3 [32:56]

It definitely got my attention, but what was his point with that comparison?

Speaker 7 [32:59]

Well, he was basically saying that you know those products they're often marketed as like these easy solutions, right, but. But their complexity can sometimes mask like hidden fees, conflicts of interest, all that shady stuff. And he sees like a parallel there with target date funds like just because they're like super easy to invest in doesn't necessarily mean they're like inherently good investments.

Speaker 3 [33:21]

Yeah, it's like that old saying, like if it sounds too good to be true.

Speaker 7 [33:25]

Probably is.

Speaker 3 [33:26]

Exactly so. Ok, let's say someone's listening to this right now and they're thinking, ok, ok, Frank's got me convinced. I want to ditch my target date fund. I'm ready to take control. What's their first step?

Speaker 7 [33:37]

You know, I think Frank would say, and I would wholeheartedly agree knowledge is the best first step. Like don't just like blindly jump from like one product to another without understanding, like what you're getting into. Right, right, right. Spend some time actually learning about like the basics of investing, things like like asset allocation, what that even means, risk tolerance, diversification, all of those fundamental concepts. And the good news is there are tons of like incredible resources available online, in libraries, you name it.

Speaker 3 [34:09]

This is where, like a little bit of effort up front can go a long way.

Speaker 7 [34:12]

Oh, absolutely. I mean, it's your financial future we're talking about here.

Speaker 3 [34:15]

Exactly.

Speaker 7 [34:15]

So yeah, once you feel like you've got a decent grasp on the basics, then you can start, you know, actually exploring different index funds. Look at their expense ratios, which is basically like how much they charge in fees. Look at their historical performance. See how they've done over time. You know. Do your research.

Speaker 3 [34:30]

So like comparison shopping basically.

Speaker 7 [34:32]

Exactly. Treat it like you're buying a car or something. Don't just go with the first one. You see and here's another tip Don't be afraid to ask for recommendations from people you trust. There are fee-only financial advisors out there who can provide guidance without pushing specific products on you.

Speaker 3 [34:51]

That's a good point, because it's all about finding someone who's like actually on your side, not just trying to like earn a commission, and speaking of which you know Frank is well, he's pretty vocal about his distrust of traditional financial advisors, isn't he?

Speaker 7 [35:05]

He's definitely skeptical and, honestly, for good reason. I mean, he's seen firsthand how some advisors they kind of benefit from keeping their clients in the dark, you know. But in the interest of fairness, he also acknowledges that there are ethical, knowledgeable advisors out there who genuinely have their clients' best interests at heart. It's just like it's about finding the right fit for you.

Speaker 3 [35:27]

It's about doing your due diligence, whether you're choosing like an index fund or a financial advisor, 100% Okay. So before we wrap things up, I do want to address the elephant in the room. You know those who might say that Frank is being, I don't know, too hard on target date funds. Yeah, like they do serve a purpose for some investors. What would you say to that?

Speaker 7 [35:46]

Well, you know, I think Frank would probably say those folks are falling for those fallacies we talked about. But no, seriously, it's like it's important to acknowledge that everyone's financial situation is unique. Right, there might be like some edge cases out there where, like a target date fund makes sense, at least temporarily.

Speaker 3 [36:12]

But even then Frank would argue for now, for whatever reason, they should still take the time to actually understand what's in it, how it works and whether it truly aligns with their long-term goals.

Speaker 7 [36:24]

Absolutely. An informed investor is an empowered investor. That's like that's the whole message Frank is trying to get across. This whole like rant, as some people might call it. It comes from a place of genuinely wanting people to be financially secure, financially literate and ultimately in control of their own destinies.

Speaker 3 [36:42]

Yeah, it's not just about being like controversial for the sake of it. It's about shaking people out of complacency and getting them engaged with their own finances 100%.

Speaker 7 [36:52]

He really believes and again I agree with him here that financial literacy is power and that everyone, regardless of their background or their current financial situation, everyone has the capacity to learn this stuff and make informed decisions.

Speaker 3 [37:06]

It's about taking ownership and understanding that you have, in a lot of cases, way more options than you might realize Exactly. Well, I think that's a great note to end on. We've covered a lot of ground today, huh.

Speaker 7 [37:17]

We really have.

Speaker 3 [37:18]

We've gone beyond just like target date funds good or bad. We've really explored the nuances, the potential pitfalls and, most importantly, like those alternative approaches out there that can like empower you to take control of your financial future.

Speaker 7 [37:34]

Absolutely.

Speaker 3 [37:35]

So for our listeners. Hopefully this deep dive has sparked some curiosity, maybe even inspired some folks to do a little digging of their own.

Speaker 7 [37:43]

Yeah, do your own research.

Speaker 3 [37:44]

Exactly. And remember this is just the beginning. The world of investing is vast. There's always more to learn, but the important thing is to start to take that first step, and the more you know, the better equipped you'll be to navigate all the complexities out there and ultimately come out ahead.

Speaker 7 [38:02]

Couldn't have said it better myself.

Speaker 3 [38:04]

And on that note we're going to wrap up this deep dive into the world of target date funds and Frank Vasquez's Simple Path to Wealth. For those who are interested in hearing more from Frank and trust me he's got a lot to say about this stuff we'll be linking to his podcast, risk Parity Radio in the show notes. Be warned, it's a wild ride, but he's got a real knack for like cutting through the noise and getting to the heart of the matter.

Speaker 7 [38:27]

Definitely a voice worth listening to. Even if you don't agree with everything he says, he'll definitely make you think.

Speaker 3 [38:32]

And that's the beauty of a deep dive like this. It's about exploring different perspectives, challenging assumptions and really just arming yourself with the knowledge you need to make the best possible decisions for your financial future.

Speaker 7 [38:46]

Couldn't have said it better myself.

Speaker 3 [38:48]

And on that note, until next time, keep learning, keep asking questions and keep diving deeper.

Speaker 5 [38:55]

And wasn't that fun.

Speaker 1 [38:57]

You're insane.

Speaker 6 [38:58]

Goldmember, and that's the way. Uh-huh, uh-huh, I like it. Kc on the Sunshine Bund.

Speaker 5 [39:07]

Next off, we have an email from Aaron.

Speaker 1 [39:11]

Hey Aaron, where are you when?

Speaker 5 [39:15]

is Aaron right now and Aaron writes.

Speaker 4 [39:20]

Frank, I just listened to episode one of your podcast on YouTube. It is probably the best debut podcast I've ever heard. You are fantastic. I went back to school for accounting and was really enjoying the first three podcasts. Keep up the great work, Frank.

Speaker 5 [39:35]

Aaron really enjoying the first three podcasts. Keep up the great work, frank, aaron. Well, thank you very much, aaron. You see, aaron is exactly the kind of person that I'm very happy when they listen to this podcast. Aaron is a former high school classmate of our eldest son, who graduated in 2014 from high school Gonzaga College High School in Washington DC, and I am always very enthused when somebody under the age of 30 is interested in listening to this sort of thing, because I did make it originally for our adult children who are in their 20s.

Speaker 1 [40:20]

I love carrot cake I love money.

Speaker 6 [40:24]

I hate all of you.

Speaker 5 [40:28]

And just so you know, Aaron, some practical advice. I can tell you what Frank, our son, is doing with this. So he is just following a simple 100% S&P 500 and some small cap value for accumulation purposes in his main retirement accounts. But then he's also got this intermediate account that is invested in a risk parity style portfolio and he uses that for large purchases, essentially Vacation, solar panels, down payments for houses, that sort of thing.

Speaker 5 [41:05]

And a risk parity style portfolio, like one of the sample portfolios similar to like a golden butterfly or a golden ratio, is also a good place to put that kind of intermediate term kind of money, because those portfolios tend to have a maximum drawdown of about three or four years in terms of time and that's generally the time scale you're looking at for them. So I know you're a long way from retirement and are mostly going to be involved in accumulation, but if you're looking for something you can actually use a risk parity style portfolio for early on, that is what I would suggest, and I'm turning 60 next week and so this is one of the best birthday presents I could imagine, which is the knowledge that younger people are actually listening to this old man at least some of them are some of the time, and it makes it all worthwhile. Hopefully you'll drop in with some more comments and commentary and thank you for your email.

Speaker 1 [42:09]

As for me, I grew to manhood In the fullness of time. I became the leader, the chief of the great northern tribe and the road warrior. That was the last we ever saw of him. He lives now only in my memories. Last off.

Speaker 5 [42:34]

Last off of an email from Pete.

Speaker 2 [42:40]

How many lumps do you want? Oh, two or four.

Speaker 4 [42:45]

And Pete writes Dear Uncle Frank and Aunt Mary, I thought you'd find this episode of Retirement Revealed interesting, busting the 4% rule myth. It's a little click-baity of a title but, in short, Derek Tharp argues that because Bengen's 4% rule is based on worst-case market and economic scenarios, it will often cause the average retiree to underspend.

Speaker 1 [43:07]

That's the fact. Yeah, that's the fact, yeah.

Speaker 4 [43:11]

However, instead of distribution-based guardrail strategies like Guyton, Klingers or Kitsis, he proposes a risk-based one using Monte Carlo probabilities of success. What struck me the most was how he framed probabilities of success. Most of us incorrectly gamify the simulations to try to achieve 80, 90, or even 95% probabilities of success. Mr Tharp points out that it may be more useful to aim for 50%, as going lower than this will increase the risk of overspending and depleting your portfolio, and, alternatively, going higher will increase the risk of underspending and oversaving. He also suggests that traditional guardrails will intervene too early, causing retirees to still underspend. Instead, his research shows that you can maintain a portfolio through a market decline until your probability of success reaches 25% before intervening and reducing withdrawals. This, of course, requires you to conduct regular Monte Carlo simulations, have a willingness and ability to adjust spending levels, and favor maximizing withdrawals over leaving a legacy to those rotten kids who find your secret stash of Belgian chocolates while you were away on a work trip and when confronted, feigned ignorance and immediately counter-accused you of hoarding sweets.

Speaker 1 [44:30]

Donate to the children's fund. Why? What have children ever done for me?

Speaker 4 [44:33]

Anyway, if you or your listeners are interested, I also found Mr Tharp's article on Kits's blog why 50% Probability of success is actually a viable Monte Carlo retirement projection. De preso liber Pete.

Speaker 1 [44:48]

By the way, how many lumps do you want? Oh better, give me a lot of lumps, a whole lot of lumps.

Speaker 5 [44:58]

Well, thank you for bringing these to our attention, pete. I will link to both the podcast you referenced and the article from the Michael Kitsis blog in our show notes. I have always been intrigued by this idea of rerunning your Monte Carlo simulation every year and using that to adjust a withdrawal rate. I think it's really a good idea anyway, because what it'll tell you is that, oh, I went from a 95% success possibility to a 89% success possibility in the worst case scenario, and so oftentimes it does actually help you feel better after you've had a bad year, and I think it could be used as a basis for a variable withdrawal strategy, although in some respects I think it's a little bit more complicated than you might need. I do agree with this observation that, yeah, a 50% probability of success would be doable if you implement a Monte Carlo based variations in withdrawal strategy, but the lower that percentage is that you pick, the more variable your withdrawals are going to have to be, and I've never come up with any real way of modeling how this would have worked in the past if you were to actually run a new Monte Carlo simulation every year on some portfolio and then adjust the safe withdrawal rate based on that. I'm not even sure how you would do that, because it would either be a historical simulation with Monte Carlo simulations embedded into it or a Monte Carlo simulation on top of more Monte Carlo simulations. Anyway, to me this is just another example or evidence that many people are vastly underspending their retirement portfolios because they are unwilling to either apply better portfolios and or better kinds of variable withdrawal strategies, which are eminently doable, and to me that's just kind of an unnecessary, self-imposed limitation or a form of learned helplessness. But I would be interested to know whether any of you do actually use some kind of strategy based on running an annual Monte Carlo simulation. I'm not aware of anybody that actually does this. It's kind of like that increasing equity glide path that in theory works great, but I'm not aware that anybody is actually doing it. Anyway, if you're out there listening to this and you do incorporate some such strategy, I'd be interested in hearing about it.

Speaker 5 [47:42]

In the meantime, hopefully you'll enjoy these links that Pete has provided to us, and thank you for your email. But now my seer signal is beginning to fade. If you have comments or questions for me, please send them to frank at riskparityradarcom. That email is frank at riskparityradiocom, or you can go to the website, wwwriskparityradiocom. 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, a review, that would be great. Okay, thanks once again for tuning in. This is Frank Vasquez with Risk Priority Radio signing off.

Speaker 6 [48:30]

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. We'll be right back.

Speaker 4 [49:31]

The Risk Parody 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. 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.