Voices [0:00]

A foolish consistency is the hobgoblin of little mind, adored by little statesmen and philosophers and divine. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer.

Mostly Queen Mary [0:18]

And now, coming to you from Dead Center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor. Broadcasting to you now from the comfort of his easy chair, here is your host, Frank Vasquez.

Mostly Uncle Frank [0:37]

Thank you, Mary, and welcome to Risk Parity Radio. If you 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.

Voices [0:52]

Expect the unexpected.

Mostly Uncle Frank [0:59]

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.

Voices [1:10]

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

Mostly Uncle Frank [1:13]

What we do have is a little free library of updated and unconflicted information for do-it-yourself investors.

Voices [1:23]

Now, who's up for a trip to the library tomorrow?

Mostly Uncle Frank [1:27]

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 459. Today on WrestleMania Radio, we're just going to do we do best here, of course, which is to answer your emails. And so without further ado.

Voices [2:03]

Here I go once again with the email.

Mostly Uncle Frank [2:06]

And first off First off, we have an email from Luke. Luke from Quebec. And Luke writes.

Mostly Queen Mary [2:20]

Hi Frank. I hope all is well with you and you had a nice trip. You might have already seen this, but just in case, I'm sharing this with you. Seems like you're causing quite a stir in the Bogleheads community. Sister Francine would be proud of you.

Voices [2:38]

It saddens and hurts me that the two young men whom I raised to believe in the Ten Commandments have returned to me as two thieves with filthy mouths and bad attitudes. Get out. And don't come back until you've redeemed yourselves.

Mostly Queen Mary [3:03]

Maybe you can use the material as inspiration for a rant. There hasn't been an official one in a long time.

Voices [3:10]

I haven't beaten anyone this bad in a long time. I haven't beaten anyone this bad in a long time. You haven't beaten anyone this bad in a long time. Oh come on, those beadies, those people are resisting rats.

Mostly Queen Mary [3:25]

He should come and stay with us for a while if he wants to hear some rants. Every day.

Voices [3:33]

I I don't want the families over here. Have a hefty day. Another big red letter day for the babies. Daddy, the browns next door to have a new car. You should see it. What's the message? I don't know why we don't want to all have pneumonia. Why do we have to live here in the first place and stay around this measly, crummy old town? George, what's wrong? Everything. Well, you call this a happy family. Why do we have to have all these kids?

Mostly Uncle Frank [4:10]

Well, first off, Luke, thank you for all you do for Risk Parity Radio. Sackgosh. Luke is not only a donor to the Father McKenna Center, but he's also the person who has recently revamped our entire website.

Voices [4:24]

We have top men working on it right now. Who top men.

Mostly Uncle Frank [4:35]

Which is getting rave reviews, by the way. He recently rolled out a improved episode guide page, which you might want to check out. And maybe we'll expand that at some point, but chances are we probably not because all of the episodes are now searchable, including the transcripts, also thanks to Luke.

Voices [5:02]

Really top drawer.

Mostly Uncle Frank [5:05]

Now getting to the substance of your email. No, I had not checked out this thread on Bogleheads about the Golden Ratio portfolio and Risk Parity Radio in general.

Voices [5:18]

It's not that I'm lazy. It's that I just don't care.

Mostly Uncle Frank [5:22]

I really do not spend any time on those kinds of fora or a lot of social media generally.

Voices [5:29]

Not gonna do it. Wouldn't be prudent at this juncture.

Mostly Uncle Frank [5:32]

I tend to keep my diet of social media limited to a couple of Facebook groups and then listening to a lot of podcasts. Anyway, I did read it. I will link to it in the show notes if anybody wants to check it out. It is about 113 posts long at the moment. And no, I don't really have a rant about it, mostly because you guys have already taken care of the things I would say. I was very heartened to see that a lot of our listeners do participate in that forum and had really answered or shot down the questions and critiques from the Hoy Peloy over there. And that includes Tyler from Portfolio Charts, who made some good responses to many of the things. He is known there as Tyler 9000. And I wonder how many of you know why he's known as Tyler 9000 and chose that moniker.

Voices [6:24]

The 9000 series is the most reliable computer ever made. No 9000 computer has ever made a mistake or distorted information. We are all, by any practical definition of the words, foolproof and incapable of error.

Mostly Uncle Frank [6:44]

Anyway, let me just give you a few observations and random musings more generally. Open the pod bay doors, Hal.

Voices [6:56]

I'm sorry, Dave. I'm afraid I can't do that. What's the problem? I think you know what the problem is just as well as I do. What are you talking about, Hal? This mission is too important for me to allow you to jeopardize it. I don't know what you're talking about, Hal. I know that you and Frank were planning to disconnect me. And I'm afraid that's something I cannot allow to happen.

Mostly Uncle Frank [7:30]

The first is that I tend to divide up investors into four basic categories. And the first category, broadest category, is people just don't know anything about investing. And usually they are worried about getting out of debt or credit scores or you know, popular consumer finance is what I would call it. And those people tend to gravitate towards things like Dave Ramsey and Susie Orman. They're looking for simple steps to make their financial life better.

Voices [7:58]

What do you want to buy? Hey everybody, Susie O here. Now, can I afford it? Has been gamified, which means you're gonna get to listen to the caller. You're gonna say, Show me the money to yourself anyway, and then you're gonna get to approve or deny it. You think you're gonna be right or wrong? Let's go and try it right now. Yeah.

Mostly Uncle Frank [8:24]

Financial media largely markets to that crowd because the idea is you get people a little bit interested in something, then eventually you funnel them to financial advisors, and that's Dave Ramsey's business model and how he gets paid.

Voices [8:37]

Yeah.

Mostly Uncle Frank [8:39]

The second level up is what I like to call the shiny object syndrome level. This is where people have learned something about investing or finances in general, but then they get sucked into one or more popular ideas on the internet, and these things come and go. But they all resemble shiny objects, and some of them are like this infinite velocity banking on your mama using insurance products.

Voices [9:04]

You're gonna end up eating a steady diet of government cheese and living in a van down by the river.

Mostly Uncle Frank [9:13]

Dividend investing is another one. Shirley, you can't be serious.

Voices [9:17]

I am serious, and don't call me Shirley.

Mostly Uncle Frank [9:20]

These days, these covered call funds are becoming the shiny objects du jour.

Voices [9:26]

A guy don't walk on the lot lest he wants to buy. They're sitting out there waiting to give you their money. Are you gonna take it?

Mostly Uncle Frank [9:34]

But most shiny objects have some kind of story that goes with them, even though financially they are suboptimal in many ways and often very expensive because ultimately they are being promoted by somebody who is going to profit from the participation or direct selling of the shiny object itself.

Voices [9:53]

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

Mostly Uncle Frank [9:59]

And then you get to level three. And level three is people who have recognized that the shiny objects are not so shiny and are probably suboptimal, and they do want to do something that is at least optimal in some way. And so this is where much of personal finance ends up, including the Bogleheads. And this is the formulaic level. You come up with some kind of formula that you follow for your investments, and that's why you have a two-fund portfolio or a three-fund portfolio or a simple path to wealth or any of those sorts of things that are just everybody should do this and then not spend very much money, and your financial life will be fine. And that's true, it'll work, but it also ends up being a form of groupthink and identity, and we'll talk a little bit more about that later. But then you get to what we call level four, and in level four, you are trying to apply good investing principles to achieve a particular goal. So this is trying to strip away the psychology of things and focus on the finances and what people on level four are doing is looking at what the best professional investors do, and then determining what part of that can be adopted, applying some principles. And that's what we try to do here.

Voices [11:20]

Now witness the firepower of this fully armed and operational battle station.

Mostly Uncle Frank [11:29]

And that's why we have three main principles: the Holy Grail principle about using uncorrelated assets, the macroallocation principle, which recognizes that macroallocations are a good part of portfolio construction. And then the simplicity principle. We use the Einstein's definition of that.

Voices [11:51]

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

Mostly Uncle Frank [11:56]

And not the boglehead, let's make things as simple as possible because simplicity is more important than anything else, and we're too stupid to handle anything more than two or three funds. So we don't use fear-based simplicity here, or simplicity for simplicity's sake.

Voices [12:17]

Always with you what cannot be done. You must unlearn what you have learned.

Mostly Uncle Frank [12:25]

And we also recognize that personal finance is primarily finance, not personal. And what that means is that your financial behaviors should match your financial goals. So the financial goal we are trying to achieve here for the most part is to construct portfolios that will have higher safe withdrawal rates so that we can spend more money while we are alive. That's the financial goal we're trying to achieve. And personal preferences about which particular family of funds we use or brokerage or exactly how many funds we have are secondary. So the way I viewed that thread that you pointed to was a clash between basically people on level three and on level four. And you could tell the people on level three a lot of times because they got caught up in the name of the golden ratio portfolio. The golden ratio. And wanted to say, oh, you're making this silly mystical grab at publicity or something to promote this thing. And it shows they really don't get it because it shows that that is their perspective, that their three fund portfolio is good because it's the three fund portfolio, and they think that I think the golden ratio portfolio is good because it's called the Golden Ratio Portfolio or incorporates the Golden Ratio itself. A number so perfect, perfect. We find it everywhere, everywhere. Secret geometry, secret geometry. Which is not true at all, but it is funny to tweak people who don't get it with the idea that, oh yes, it's a mystical, magical thing. A mathematical property hardwired into nature.

Voices [14:12]

Secrets, secrets, secrets, secrets.

Mostly Uncle Frank [14:15]

In reality, that portfolio is a sample portfolio, just like we say, it's a sample portfolio. It's one of a number of portfolios on a spectrum that would have high safe withdrawal rates. And the main reason we would call it something like the golden ratio portfolio is because we needed to name it something. And so the simplest names are the mathematical names, like 6040 or 50-30-20. That's all the golden ratio is. It's a mathematical name for something. We could have called it the five-slot kind of like 60-40 portfolio, which would be kind of cumbersome. That goes without saying. But if you are getting hung up on the name and the specific details of the math there, you are missing the point because you are applying a formulaic construct or level three kind of construct to something that is designed to be an example of a application of principles. And so a lot of Bogleheads there were missing the point. And as a lot of you listeners pointed out, they were missing the point.

Voices [15:28]

That's not how it works. That's not how any of this works.

Mostly Uncle Frank [15:32]

And I'm pleased that a lot of you listeners did articulate the counter-arguments and the real principles so clearly, because I thought it was a good discussion, to the point that I don't have to say anything or do anything, and the word gets out there. I'm very pleased with that, and thank you for it. I just stare at my desk, but it looks like I'm working. Because what is ultimately really going on there is they are not trying to solve the same problem that we're trying to solve here, which is to spend more money in retirement and have a higher safe withdrawal rate in retirement and use portfolio construction for that financial goal. They don't have that financial goal. They've solved that financial goal by deciding not to spend money.

Voices [16:15]

What's with you anyway? I can't help it. I'm a greedy slob. It's my hobby.

Mostly Uncle Frank [16:20]

And once you've decided that you're really not going to spend much money, then what your specific portfolio is does become something else. It becomes part of your identity. It becomes part of a reason or way to join a club, if you will.

Voices [16:37]

I've got a good mind to join a club and beat you over the head with it.

Mostly Uncle Frank [16:41]

And to have some kind of personal talisman to rely on in the form of a formula.

Voices [16:48]

It's so simple. Isn't it you guys? Isn't it simple? If you followed all the instructional material, you just said it every day.

Mostly Uncle Frank [16:57]

It's really part of this savor identity. And I just got Morgan Housel's book a couple of weeks ago, the new one called Art of Spending. And I don't usually do this, but I will read this segment because I think this really describes what is ultimately going on here and why a lot of the people in the Bogleheads community don't understand or are trying to do something different or don't want to acknowledge what the reality of their situation is as compared to what somebody else is doing that wants to spend money. And here's the passage. It's on pages 150 and 151 in the chapter about identity. Morgan writes, Let me share the most common financial identity that can harm people in ways they never imagined. Quote, I am a saver, unquote. It seems like such a good trait, and it sounds so innocent. And of course both are true, but a lot of financial planners will tell you that they're one of their biggest challenges is getting clients to spend money in retirement. Even an appropriate conservative amount of money. Frugality and saving become such a big part of some people's identity that they can never switch gears. I call it frugality inertia. It's what happens when a lifetime of good saving habits can't be transitioned into a reasonable spending phase. I think what most people really want from money is the ability to stop thinking about money, to save enough money that they can stop thinking about it and focus on other stuff. But that ultimate goal can break down when your relationship with saving money becomes an ingrained part of your personality. You struggle to break away from focusing on money because the focus itself is a big part of your identity. You associate life success with your bank account going up, up, up, and you've never been able to actually spend it, even in a reasonable way. If you develop an early system of saving and living well below your means, congratulations, that's great. But if you can never break away from that system and insist on a heavy saving regimen well into your retirement years, what is that? Is that still winning? Those with the ultimate goal to stop thinking about money are stuck. Refusing to recognize that you've met your goal can be as bad as never meeting the goal to begin with. Unquote. So if you've essentially solved your money problems by just oversaving and continuing to accumulate until death, yeah, you can pick pretty much whatever portfolio you want to and gravitate towards some kind of simple formula. And when there's a social group that surrounds it, it makes it all that more attractive. Because then you can name yourself and have that identity for yourself. And on that note, Housel goes on on page 152 of this, where he writes, quote, it's common in investing where people take on labels like, quote, value investor, unquote, trader, and tech investor. The labels seem harmless, but once you label yourself, you've formed an identity that can prevent you from seeing the big picture, finding other opportunities, or changing your mind when you need to. Unquote. And that's what this club, the Bogleheads, is essentially. Or rather has become over the past 20 years, because it certainly didn't set out that way.

Voices [20:29]

Please accept my resignation. I don't want to belong to any club that'll accept me as a member.

Mostly Uncle Frank [20:37]

But it's funny how that thread illustrated how that leads to a lot of mental gymnastics and just fallacious reasoning when it comes to some of the critiques in that thread. A lot of them were of the nature of the general truism that applies to everything. And if you say something that applies to everything, then it does not distinguish between two things like portfolio A and portfolio B. The biggest one there is the oft-quoted, past performance does not predict future results. And some of the Bogleheads said that, and as some of you pointed out, it's like, well, that applies to every portfolio, your portfolio, this portfolio, and does not give you any mechanism for deciding whether portfolio A is better than portfolio B for some particular purpose.

Voices [21:25]

Are you stupid or something?

Mostly Uncle Frank [21:28]

Another form of fallacious reasoning is to make up additional tests that were not important and probably aren't important to distinguish from one portfolio to another.

Voices [21:39]

These go to 11.

Mostly Uncle Frank [21:41]

So, confronted with the information in that thread showing that these kinds of risk parity style portfolios tend to have higher safe withdrawal rates and lower volatility over many periods in time and the longest periods in time. There were some of the commenters who were saying something like, Well, what about the Sortino ratio in the 1990s? It's like, where did that come from and why is that important? What goal is that ultimately serving? And this does go back to the fact that a lot of these people are just applying formulas for their identity and have forgotten what the goal ultimately was of having a particular portfolio. But unless you define a goal first and then apply it to portfolio A versus portfolio B, you're really just engaging in fallacious reasoning if you're trying to say, let me see if I can think up tests that show that this particular portfolio is better than the other one, even if those tests don't have any meaning in what I'm actually trying to achieve. And then another source of fallacious reasoning is simply the cherry picking of the data. And a lot of this involves not accounting for the 1970s as if things like the 1970s can never occur again. And this is where people confuse the specifics of an anthistorical period and the economic consequences. And the specifics are always going to be different. This time is always going to be different. No, you're never going to have the exact same factual predicates of the 1970s or of the early 2000s. But the fact of the matter is a whole series of different kinds of causes can cause similar effects economically. And so there are a lot of things that can cause inflation. There are a lot of things that can cause recessions. There are a lot of things that can cause, say, the price of gold to go up a lot in a short period of time.

Voices [23:40]

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

Mostly Uncle Frank [23:44]

And that's where a lot of these people get stuck. In order to make their argument work, they have to say that, oh, that's because there was this one situation and that's never going to happen again. Those things can both be true and you can still be wrong.

Voices [24:05]

Wrong!

Mostly Uncle Frank [24:06]

Because the economic conditions can repeat for more than one reason. Another way to say that is rare events do reoccur, just not very often. So in 2022, we had the rare event of an inflationary spike accompanied by the Fed raising interest rates very quickly. And so you had something that you had not seen since the 1970s in terms of the way stocks and bonds both underperformed. But that's not the first time that happened. It's not the last time it's going to happen. It's a low probability event, and just because it happened in 2022 doesn't make it more likely it's going to happen again. But now you're seeing a similar thing this year. People said, well, the only reason gold went up a whole lot in the 1970s is because Nixon did this and there was this occurrence and there was an oil embargo or whatever.

Voices [24:56]

Real wrath of God type stuff. Exactly.

Mostly Uncle Frank [24:59]

But now we're experiencing the same thing again. So the argument that you can't have a situation like the 1970s with respect to some of these alternative assets is just wrong, and it's always been wrong.

Voices [25:12]

Right? Wrong!

Mostly Uncle Frank [25:13]

There's a small probability that you will have that kind of situation again, and we'll see gold going up 50 or 60% in a year, like it's going up this year. Suppose it has a 2 or 3% chance of occurring. That's just like rolling two sixes on a set of two dice. No, it doesn't occur very often, but it does occur with a regular frequency if you roll the dice long enough. At bottom, if you have to cherry pick data like that and exclude some periods because if you included them, you'd be wrong.

Voices [25:43]

Wrong!

Mostly Uncle Frank [25:45]

It shows you really don't have a leg to stand on in terms of your logical or analytical reasoning.

Voices [25:52]

I award you no points, and may God have mercy on your soul.

Mostly Uncle Frank [25:58]

Anyway, I feel like I've gone on now far too long in this one email. Because now I only have time for only one other email. So I'm going to stop here. But check out that thread if you're interested. Remember, we're not doing sorcery here or using portfolios as identities or to form clubs around.

Voices [26:17]

If you're the police, where are your badges? Badges? We ain't got no badges. We don't need no badges. I don't have to show you any stinking badges.

Mostly Uncle Frank [26:29]

Thank you for all your contributions to this podcast, Luke. And thank you for your email.

Voices [26:36]

A number is so perfect. Perfect. We find it everywhere, everywhere. A mathematical property hardwired into nature. The golden radio. The golden radio. The golden radio.

Mostly Uncle Frank [27:12]

Last off. Last off, we have an email from Nick. For Nikki, this is a picnic compared to where he's from.

Voices [27:24]

That's a drunk son. Don't stand in front of them.

Mostly Queen Mary [27:26]

Well, I'll have to take a mulligan on this one.

Mostly Uncle Frank [27:30]

And Nick writes.

Mostly Queen Mary [27:31]

Hey Frank. First, I just wanted to say how much I appreciate your podcast and have really enjoyed hearing you get the platform you deserve lately on the Bigger Personal Finance podcast to share your thoughts about a risk parity portfolio.

Voices [27:45]

Yes!

Mostly Queen Mary [27:46]

I'm a longtime member of the Choose If I and Bigger Pockets Money Groups and have always enjoyed your posts, willingness to go against the status quo, and overall insight when answering questions. I thought I'd send an email to ask a few questions, even though I feel pretty comfortable in my wife's and my position towards reaching financial independence around age 45 for me and 41 for her. A little about us. I am 27, she is 23. We make about $180,000 a year just outside of Raleigh, North Carolina, although this is expected to rise to somewhere around $225,000 to $250,000 in the next two to three years. Software, engineer, and tech sales. Our current spend is about $7,000 a month, but I estimate our retirement spending to be somewhere around $10,000 a month in today's dollars as we currently rent and have no kids. This is a very gross estimate. We invest around $3,800 a month, including $401K match, split between traditional Roth and taxable accounts. Our current investments are around $216,000, including about $125 in $401Ks invested in a Vanguard SP $500 index fund and $91,000 invested in VTI across Roth IRAs, a taxable brokerage account, and an old HSA. My questions for you are the following. Would you change our accumulation portfolios to include small cap value? If so, how much of a percentage would you be comfortable with? Like many in the group, I started out with the simple path to wealth, but as I have listened more to you, Paul Merriman, and Joe Salsehai, I do see the value of having a small cap value tilt when I look through recency bias and how the SP has dominated through my adult lifetime, but have heard anywhere from 10% to 50%. 2. When I transition to a risk parity portfolio as I get closer to retirement, I assume VTI would suffice as my large cap growth holding. I am fairly certain I've heard you say this is fine, but notice you chose VUG on the Bigger Pockets Money podcast when setting up the portfolio with Mindy. So I just wanted to make sure. Holding VTI would help reduce capital gains tax in our brokerage account. Three, you touched on it a bit at the end of the same episode, but assuming all things equal, one-third of investments are each in traditional Roth and taxable accounts, but we will want the taxable account to bridge us to 15 years or so until 59 and a half. How would you go about allocating and pulling from these accounts? The obvious would be fill-up bonds, VGLT, and VGIT in traditional accounts, fill-up stocks, VTI and AVUV in Roth accounts, put the spillover stocks in the taxable account. I would think VTI since AVUV has slightly more growth potential, so I would want that in the Roths. I would have my 6% cash in SPAXX in the brokerage, but after that I'm not sure how I should think about where to put gold or managed futures. Speaking of managed futures, are there any substitutes to this part of the portfolio? Thanks so much for any insight and all you do for the financial independence community. I appreciate hearing the ravings of a lunatic mind.

Voices [31:08]

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

Mostly Uncle Frank [31:15]

Well, Nick, thank you for writing in. I'm glad you're enjoying the podcast. You are about the same age as our adult children.

Voices [31:24]

What have children ever done for me?

Mostly Uncle Frank [31:27]

And I see you're whipping and snapping out there, as you youngsters are wont to do. Cool. And it sounds like you are well on your way to financial independence.

Voices [31:41]

Fire, fire, fire, fire.

Mostly Uncle Frank [31:45]

So congratulations on that.

Voices [31:47]

That and a nickel get your hot cup, a jack squat.

Mostly Uncle Frank [31:53]

Getting your questions, first ones, would you change your accumulation portfolio to include small cap value? Well, the answer is I probably would, but I think you want to think about this in terms of your ultimate goals. First, just let's get something out of the way, which is the macro allocation principle. That all 100% index fund portfolios that are reasonably well diversified, even though there's one, two, three, four funds in them, they're all going to work. They're all going to get you to financial independence. And which one's going to be the best one, particularly in the next decade, is a crapshoot.

Voices [32:31]

Shake them up, shake them up, shake them up, shake them.

Mostly Uncle Frank [32:34]

So you do need to kind of pick something and stick with it, or pick some plan and stick with it, because the real danger is not what you pick, but jumping in and out of different funds trying to chase performance or doing things like that. That is actually how people underperform and slow themselves down. That and making things more complicated by using target date funds and robo thingies and other shiny objects they find lying around.

Voices [33:02]

Fat, drunk, and stupid is no way to go through lifestyle.

Mostly Uncle Frank [33:05]

Here's what I think you really should be thinking about is where do you want to end up with this portfolio? Because whatever you're putting into this stock portfolio, this all stock portfolio, that is probably going to end up being the lion's share or a big portion of what your stock portion of your retirement portfolio is going to be. At least it'd be easier if you didn't have to do too much transitioning. And what the research has shown here is that having a portfolio that is about half value tilted and half either large cap total market or growth tilted, except for small cap growth, tends to result in portfolios with higher safe withdrawal rates and nice characteristics in terms of volatility and drawdowns. So that's a good place to try to get to eventually, half growth and half value. Obviously, the easiest way to get there eventually is to just start there. So you could do half VTI or an S P 500 fund or a large cap growth fund. And the reason I like the large cap growth fund is because it's the most growth and most diversified from the value stocks in the portfolio. And then on the other side, you'd have to pick some value stocks. Now, regardless of whether you think small cap value is going to outperform the rest of the entire market, it is pretty obvious that small cap value is likely to outperform large cap value over long periods of time. Large cap value is mainly held for stability purposes and makes a good addition to a retirement portfolio, but it's probably not something you want to accumulate in. So small cap value is the most natural, simple choice to make in an accumulation portfolio when paired with a total market or large cap growth fund. But that doesn't mean it's the only choice. You could have some large cap value or some mid-cap value or some international value. Whatever you think you are going to end up with is probably what you want to start with. Or maybe if you're really creative, you want to construct some kind of glide path where you are adding to the value portion as you go on to make it easier to transition eventually. There are many paths you can take here, and since this is an area of uncertainty and that we don't know exactly what's going to perform well in the near future in particular, and the nearer it is, the less we know. You should just pick a path that feels comfortable to you and then stick with the path and not get distracted by the news or what's going on out there and not be jumping in and out of things. Which leads to your question two: when you transition to the portfolio in retirement, the risk parity style portfolio, you assume VTI would suffice as your large cap growth holding. Yes, that's a pretty safe assumption, particularly the way the US markets have evolved over time. It tends to be more and more focused on large tech firms, and that's large cap growth. And that's likely to be true for a very long time in the future. The reason I chose VUG is that I do like it for its diversification properties against value stocks. That since it's all growth and all large cap growth, it is more diversified from value stocks than VTI or VOO, but not by much. And while I might make adjustments in a retirement account, I certainly would not be incurring large tax liabilities to switch from VTI or VOO to VUG. Because again, this is not really that important in the grand scheme of things. Don't get hung up on specific funds or specific formulas. Well, remember we're trying to apply some principles here.

Voices [36:47]

Don't be saucy with me, Bernays.

Mostly Uncle Frank [36:50]

Okay, you were asking about question three, about asset location. Yes, you should treat your entire collection of assets as one big portfolio and then locate them in different accounts for tax optimization. So that basically means that anything that is paying significant ordinary income goes in a traditional retirement account, which includes bonds, managed futures, REITs. Just look and see whether it's generating significant ordinary income. If you're holding a lot of cash, sometimes you want to put that in the retirement account as well, particularly if you're not really using it yet. You typically put your best growing assets in Roth accounts. So that's generally your equities. And then in taxable accounts, you want things that either don't pay income or at least pay qualified dividends as income because they get taxed at a lower rate, which again is generally stocks. Now with the alternatives, managed futures generally go into the traditional retirement account because they throw off ordinary income every year. Something like gold can essentially go anywhere. It doesn't pay any income. It does have some peculiar tax rules to it. But oftentimes when you're talking about these smaller allocations to things, you're looking at where do I have room? And so put it where you have room after you've done all of the other allocating that I've just mentioned. Okay, is your last question? Speaking of managed futures, are there any substitutes for to this part of the portfolio? And in some respects, that's just a bad question because it assumes that this is a formula portfolio that you have to have it in these proportions with these particular funds. And that is a level three kind of thinking. If we're a level four kind of thinking when we're applying principles, of course, there are different things you could use besides manage futures in one of these kinds of portfolios. The general guidelines and what seems to work well in these kinds of portfolios is to have between 10 and about 25% of your portfolio in alternative assets. And those assets to be an alternative asset that you would want need to be something that has a very low or no correlation to both stocks and treasury bonds. And so gold and managed futures fit those bills. But maybe you want to have 10 or 15 or 20% in gold and no managed futures. Now managed futures and gold are also not very correlated. So there is some advantage to holding both of them in that slot. But you can certainly construct one of these kinds of portfolios without using managed futures. So some people want to have more of an equity focus or percentage, a higher equity percentage in their portfolio. So it's more like 60% or 50%. And if you're doing that, you would take the 16% allocation slot or the 10% allocation slot in this kind of portfolio and essentially put more stocks in it. You could put, for example, 10% in a utilities fund or 10% in a REIT fund because both of those have low correlations to the rest of the stock market. Or maybe you pick some growth and value international stocks for something in that part of the portfolio. What that will give you is something that is likely to have a higher overall return profile longer term, but is going to have higher volatility. That's the trade-off. It will likely have similar characteristics as far as the overall safe withdrawal rate. That's why we say that you want to have your stocks in this kind of portfolio to be somewhere in the 40% range to the 70% range. Because as Bill Bangin has found in his old research and his new research, that happens to be kind of the sweet spot for a high safe withdrawal rate. This is also why we say the bonds should be somewhere between about 15 and 30%, because that seems to work well with treasury bonds, intermediate andor long-term treasury bonds. And then the fourth guideline is to have less than 10% in cash. And there's nothing to say that that 6% in cash needs to be in cash. Because maybe you have other sources of cash. Maybe you don't really need any cash in this portfolio at all. And that's the kind of portfolio we constructed with Mindy Jensen, where she took that 6% and allocated it towards international stocks. So there are many variations to these portfolios that will give you high sale withdrawal rates, and they don't necessarily require you to hold managed futures. That being said, that particular allocation does seem to do much better than just about any other alternative or pseudo-alternative that you can think of, whether that's private equity or private debt, which are become popular these days. They don't make good alternatives because they are correlated to public equity and public debt. People sometimes try to use tips as an alternative, and those don't really work either because they're bonds, or other funky weird bond funds involving high yield and things like that. Those are also bonds, and they also tend to have higher correlations to stocks and bonds, so they don't work as well as an alternative as something like managed futures. But yes, there are many ways to construct these kinds of portfolios. And given how young you are, you have plenty of time to think about it, which is nice because a lot of these ETFs are still developing, if you will, and you may have more and better options in another 10 years that we just don't have today, or we don't really recognize or know are good options these days. As I like to say, personal finance is an evolving technology like smartphones. It's not like a Dead Sea scroll that you just read and follow and never deviate from. That again is level three thinking. It's not level four thinking.

Voices [42:57]

That's not an improvement.

Mostly Uncle Frank [42:59]

But I am very glad you're thinking about these things and getting something out of this. One of the things you might consider doing is what our children use risk parity style portfolios for now, which is as intermediate accumulation portfolios. So they have their retirement portfolios that are 100% stocks, which is most of their money. They have an emergency fund, which is their cash. But in between that, they also have a essentially a slush fund that is in a risk parity style portfolio because it allows for some growth, but also kind of free access to it. So our eldest son has bought things like solar panels and now he's got to buy a new stove for the house. So it can be used as kind of an extra emergency fund or longer-term emergency fund than your typical need the cash now kind of emergency fund. So you might just set up one of those and kind of do a little practice in it to see what kind of retirement portfolio you eventually want to hold. If you're doing something like that, you don't really need to do rebalancing, you just keep adding to the things that are the lowest whenever you're adding money to the portfolio. And then if you're ever taking money out of it, you take from whatever's doing the best. And it makes the management of it simple and the taxes lower. Anyway, there's another idea for you. Hopefully that helps. And thank you for your email. But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to Frank at RiskPardyRadio.com. That email is Frank at RiskPartyRadio.com. Or you can go to the website www.riskparty radio.com. Put your message into the contact format, 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. Thank you once again for tuning in. This is Frank Vasquez with Risk Party Radio. Signing off.

Voices [45:08]

And it's gone. Poof. Uh what? It's gone. It's all gone.

Mostly Queen Mary [45:16]

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. 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.