Voices [0:00]

A foolish consistency is the hobgoblin of little mind, 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 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 [0:55]

There are basically two kinds of people that like to hang out in this little dive bar.

Voices [1:00]

You see, in this world, there's two kinds of people, my friend.

Mostly Uncle Frank [1:04]

The smaller group are those who actually think the host is funny, regardless of the content of the podcast.

Voices [1:12]

Funny how? How am I funny?

Mostly Uncle Frank [1:14]

These include friends and family and a number of people named Abby.

Voices [1:20]

Abby someone.

Mostly Uncle Frank [1:22]

Abby who?

Voices [1:23]

Abby Normal. Abby Normal.

Mostly Uncle Frank [1:29]

The larger group includes a number of highly successful do-it-yourself investors, many of whom have accumulated multimillion dollar portfolios over a period of years.

Voices [1:42]

The best, Jerry. The best.

Mostly Uncle Frank [1:45]

And they are here to share information and to gather information to help them continue managing their portfolios as they go forward, particularly as they get to their distribution or decumulation phases of their financial life.

Voices [2:04]

What we do is if we need that extra push over the cliff, you know what we do? Put it up to a nevin, exactly.

Mostly Uncle Frank [2:11]

But whomever you are, you are welcome here. But now onward, episode 461. Today's party radio, we're just going to do what we do best here. Which means we're going to answer your emails.

Voices [2:32]

I could have told you that.

Mostly Uncle Frank [2:34]

And so without further ado.

Voices [2:36]

Here I go once again with the email.

Mostly Uncle Frank [2:40]

And first off. First off, we have an email from Tyson.

Voices [2:47]

Like you have my favorite quote that everybody has a plan. Sometimes they punch you back in the face. Yeah, I have a plan too, you gotta be careful with that.

Mostly Uncle Frank [2:59]

And Tyson writes.

Mostly Queen Mary [3:01]

Hi Frank, I hope you're doing well. I just wanted to thank you for the great podcast I recently saw on Bigger Pocket's Money.

Voices [3:08]

Shall we?

Mostly Queen Mary [3:10]

It was extremely knowledgeable and insightful, and I really appreciated how clearly you explained the concepts. One, you mentioned that we should shift to the recommended allocation once we're at 80% of our fire number. My question is, at that 80% point, do you simply adjust the allocation and let it ride until you reach your full fire number before starting withdrawals? Or do you actually begin the withdrawals at that 80% point? For example, if my fire number is $5 million and I change the allocation at $4.5 million, should I let it grow to $5 million before withdrawing or start withdrawals right at $4.5 million? 2. In your model you allocate a portion of gold. Given that Bitcoin is often referred to as digital gold, and it has performed very well for me over the past six to seven years, do you think it could be a reasonable substitute for gold in this strategy, especially for millennials? That's not how it works. That's not how any of this works. Or do you suggest sticking with traditional gold for the sake of stability?

Voices [4:24]

Yes!

Mostly Queen Mary [4:25]

Three, for the stock portion, you suggested splitting it half value and half growth. For the value half, would it be reasonable to use SCHD instead of the specific ETFs or funds you mentioned in the podcast? Four, is this portfolio designed to last for 30 years or for life? And it's gone. I'm currently 40 years old and expect to reach my fire number in about two years. Since I don't plan on dying any time soon, I'd like to be reassured that this portfolio could sustain me for the rest of my life, not just three decades. Thank you again for sharing your expertise. Your breakdown of these concepts has been incredibly helpful, and I look forward to hearing your thoughts. Best regards, Tyson.

Mostly Uncle Frank [5:14]

Well, hello, Tyson.

Voices [5:16]

One question. How do you come up with the saying everyone has a game plan until they get punched in the face? It's iconic. Well, that's what it happened. Everybody had a game plan until they get punched in the face. Then they gotta go to plan two. Punch the other guy.

Mostly Uncle Frank [5:30]

I'm glad you enjoyed my appearances on Bigger Pockets Money. They were two from last July. One where I explained the basics of risk parity style investing, particularly for retirement portfolios, and then one where we constructed an actual portfolio that Mindy Jensen now holds. I will link to both of those in the show notes there on YouTube, as well as podcast providers, but you can actually see us on YouTube. But let's get into your questions. The first one was about the retirement point versus the transition point. And the basic recommendation that I've made and others have kind of agreed with is that you probably want to start transitioning your accumulation portfolio to a retirement portfolio a few years before you actually enter into retirement and start living off the portfolio. And that's the key factor is are you taking money out of this or putting money into it? So a good kind of ballpark estimate is if you are about 80% to the portfolio size that you think you need, your fire number, and are a few years out, say five years out, you can make that transition and then just let your portfolio continue to grow until it reaches the number. So no, you're not taking money out of it right away. The purpose of doing it before you actually retire is simply to avoid a bad sequence of returns risk, because if you're holding something like a hundred percent stock portfolio all the way up to retirement, there's a possibility that two years before your retirement we have the year 2000 to 2003 or 2008, in which case, all of a sudden you don't have enough to retire. In fact, you may only have 60% of what you had before. And so the only way to get around that, I shouldn't say the only way, but the most efficacious way to get around that is simply to make the transition at some point earlier in time. And the only question is, how early do you think you need to be? The way this works in real life is kind of interesting because almost nobody actually picks one number and retires when they get to exactly that number. What typically happens is that people have a phi number in mind and will end up exceeding it because they don't want to quit working. They're not ready to quit working, or there's some other things going on, maybe their portfolio is growing more than they expected. Many other conditions could be affecting this. So oftentimes people get to a point where they're saying 80% to a Phi number with part of their portfolio and can convert that part of the portfolio, and then they continue to go on and accumulate more assets. And what you do with that more assets is completely flexible. I mean, you could invest it aggressively and take your chances with it because you don't need it to rely on it, or maybe you just stick it away in cash because you're planning on taking a big trip or having some large expense that you want to spend extra money on. So you may have a period in time where you are neither adding to nor subtracting from a retirement portfolio. That situation is also modeled by the concept of Coast Fi, where you accumulate some amount of money early on and then just put it aside and let it grow, knowing that eventually that will grow into your Phi number, your retirement number that you need. And then in the meantime, you can go off and just earn money and spend it and not be worried about accumulating anything anymore. So there are going to be many different approaches here in reality, depending on your particular circumstances. The only problem we're trying to solve with a conversion sometime before you actually get to financial independence is to make sure you don't have that crash right before you plan to retire. That ruins your possibility of retiring on a date that you had selected in the past. Because if you're young enough and you have a choice, you can always just keep working in the worst case scenario with that. If you're older, you may not have that choice. And that is actually what causes most people to retire is they are retired by their employer or by some other circumstances. Now, your second question is whether you could allocate towards Bitcoin instead of gold in a portfolio like this. And the answer is no, at least not right now.

Voices [9:57]

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

Mostly Uncle Frank [10:01]

Gold has a couple of unique properties that are unique to gold and do not apply to Bitcoin or just about any other non-financial asset. And that is gold is part of the plumbing, if you will, of the international economic system. And in particular, it is an asset that is held by central banks around the world as a backup asset. So a lot of the demand for gold, particularly these days, comes from central banks buying gold as a backup or reserve asset. Bitcoin doesn't fulfill that role, and really nothing else does. That's not a currency or a treasury bond or something like that. There's actually a set of international banking regulations that apply to this, and they're called the Basel Regulations after the city in Switzerland, and they're up to what they call Basel III now. And under the Basel III regulations, gold is a tier one asset, which means it can be used as a primary reserve asset by not only central banks, but also commercial banks in terms of their regulatory requirements. And that does not apply to something like Bitcoin, which is purely a speculative asset and is driven by private demand in particular. One of the problems with it right now is it still seems to be highly correlated to other risk assets, especially technology-related stocks. And it does not make a very good diversifier if it's correlated with stocks. Because the point of using an alternative asset in one of these kind of portfolios is that it has essentially zero correlation with both stocks and bonds. That is the kind of alternative asset you're looking for. And at least right now, Bitcoin does not fulfill that requirement. Maybe it will in the future, but maybe it won't. We don't know.

Speaker 14 [11:51]

We don't know. What do we know? You don't know, I don't know, nobody knows.

Mostly Uncle Frank [11:57]

So you would not use it as a substitute for gold in one of these kind of portfolios.

Voices [12:02]

Forget about it.

Mostly Uncle Frank [12:04]

And we do have an episode about the potential use of Bitcoin in one of these kind of portfolios. It's episode 29, and you will find it along with all of the other investment specific related episodes on the episode guide page at the website at www.riskperdireater.com.

Voices [12:22]

That is the straight stuff, oh funkmaster.

Mostly Uncle Frank [12:25]

It's interesting, at that point in time it had a volatility that was about 10 times that of the stock market. It seems to have a volatility of about three times the NASDAQ right now, which is important if you are considering using it for sizing. Right now, it performs like a levered NASDAQ fund. But these characteristics seem to be changing as this asset evolves and as it becomes more accepted by the large players in the financial services industry that now have put out all these ETFs and things. But it still would only be used as an add-on asset and perhaps a source of leverage in some ways. At least right now. Alright, your third question was whether you could use SCHD as part of the value allocation in one of these kinds of portfolios. And the answer is yes, you can. That's a good large cap value fund to use. It's relatively inexpensive. And sits way over there on the value scale. And that's the way I tend to look at funds. I will run them through the analyzer there at Morningstar, which tells you all about them, including where they fall in terms of growth and value and size. The one thing you should know about large cap value in particular is it that it tends to have both lower volatility and lower overall returns than the rest of the stock market. Mostly because it's very predictable or relatively predictable compared to, say, growth stocks or smaller stocks, and therefore the market does a very good job at pricing it accurately.

Voices [14:01]

That's the fact, Jack!

Mostly Uncle Frank [14:03]

So it has traditionally been like a core holding of designed retirement portfolios, say like the Vanguard Wellington Fund or Vanguard Wellesley Fund, will have a tilt towards large cap value. And if you are modeling in in various calculators that are modeling by asset class, you would model that as large cap value and would not expect it to outperform the asset class generally. And your last question was whether these portfolios are designed to last for 30 years or for life. And the answer is the latter. This business about 30 years, it's a litmus test for me. Because somebody who does not really understand how the safe withdrawal rate works thinks 30 years is an important metric. Am I right or am I right or am I right? Right, right, right. All 30 years is, is just you have to pick some time frame so that you can compare one portfolio to another. But you could have picked 20 years, you could have picked 40 years, you could have picked 50 years. Now, as it happens, and we know this from both from Bill Bangin's original research and from the current research and from all of the charts at portfolio charts and elsewhere where you can look this up, is that this function is asymptotic. So that means as it goes out, the safe withdrawal rate function to 45, 50, 60 years, it does not keep going down. It flattens out. And essentially, to go from 30 years to forever, you would subtract about 0.6 from the 30-year safe withdrawal rate. And you can see this in Bill Bangin's book, or you can just go to the portfolio charts site and look up a portfolio, say the golden ratio portfolio, it'll say if you do a 30-year retirement, it has a safe withdrawal rate of 6.1 since 1970, and you go out to 45 years and it says 5.4. So subtract 0.6 or 0.7 if you prefer. The truth is you get that back though. And the way you get that back is that if you are assuming you are an average retiree, then you should not be assuming that you are going to experience inflation at the rate of the CPI. You are going to experience inflation at the rate of CPI minus 1% to CPI minus 2%. That is not the standard assumption. But if you make the accurate assumption that you are going to be a typical retiree or be able to organize your finances in such a way that you can be a typical retiree, then you should be using CPI minus 1 to CPI minus 2. If you do that, it has the effect of increasing the safe withdrawal rate by between 0.5 and 1%. So what that means is that for you, for a retirement that's going to last, say, 50 or 60 years, and you are an average retiree, that 30-year estimate turns out to be much more accurate than a long-term estimate that adds CPI inflation. Because you subtract the 0.6 or 0.7, and then you add back somewhere between 0.5 and 1. And guess what? You get back to that 30-year estimate using the CPI rate of inflation.

Voices [17:23]

Did you get that memo?

Mostly Uncle Frank [17:25]

So it's mathematical happenstance, but that 30-year estimate using CPI inflation is actually a fairly good estimate for forever using actual inflation.

Speaker 14 [17:39]

Yeah. Didn't you get that memo?

Mostly Uncle Frank [17:43]

The bottom line is your portfolio does not turn into a pumpkin after 30 years. It just doesn't. That's not the way this works. That's not the way it's ever worked. If you run into people saying it only works for 30 years, the answer is they are wrong and they don't understand how the calculation works. So they're either ignorant or fear-mongering. Or maybe both. Or stop using that as a basis to sell their services or lower the bar for what they are doing.

Voices [18:58]

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

Mostly Uncle Frank [19:04]

So, hopefully, those answers help. I'm glad you're enjoying the podcast. And thank you for your email.

Voices [19:22]

Second off.

Mostly Uncle Frank [19:23]

Second off, we have an email from Patrick.

Voices [19:28]

I got you though, SpongeBob!

Mostly Uncle Frank [19:34]

And Patrick Wright's.

Mostly Queen Mary [19:36]

Hi, Frank. I just heard episode 412, and in the third question from Mr. Data, he asked why Paul Merriman is a small cap growth fund, wherein you told him he must have confused himself as Paul is a big small cap value guy. However, Mr. Data is right in that Paul does have small cap blend in several of his recommended portfolios, specifically his four-fund US variant and ultimate buy and hold portfolios. Now Paul labels this small cap blend not growth, so perhaps that skews far enough away from the hideous growth factor for small caps that it becomes palatable? In their best in class recommendations, they choose AVSC for this class, which in Morningstar falls right into the value column. Interestingly enough, if you look at AVUV, it falls right into the same box on Morningstar. This leads me to another question. What is with Avantis and these value slash equity paired funds, e.g. AVUV slash AVSV or AVLV slash AVLC, that almost fall on top of each other factor-wise. Are these pairings different enough to be worth rebalancing between? I forgot to mention this in the first email, but perhaps the source of confusion is the similar seeming terms of blend in PAL's funds that look like they're being used where one would place growth funds, as well as Avances' use of equity for its more growth y but still apparently value ETFs. Best, Patrick.

Voices [21:13]

All I know is Mr. Krabs said Patrick, don't do that! Cheesy.

Mostly Uncle Frank [21:23]

Well, Patrick, you might have the wrong podcast for answering these questions because I am not responsible for how Paul Merriman rates his funds or classifies them. I would use the classifications you see at Morningstar for comparison purposes between two funds. And to me, if it's in the small cap value box there, it's a small cap value fund. If it's in the large cap value box, like SCHD we just talked about, it's a large cap value fund. And so honestly, I only take the names of funds with a grain of salt, because what they are entitled and what they actually do or how they actually perform or should be classified can be two different things. And you just have to do your homework. Now, if you listen to a lot of what Paul Merriman says or read a lot of what he says, he will tell you eventually that the small cap growth category of all those style boxes has relatively high performance, but also has relatively high volatility and so is not a good performer overall compared to say small cap value or large cap blend. If you look at his portfolios, they are all structured as essentially half blend, which sometimes is growth y like it is now, and is sometimes more value tilted, which happens basically when the stock market crashes, the blend funds will go from the growth side to the value side, because the growth stocks in them will tend to crash and they will acquire more value characteristics. So that being said, what his foundation is based on is having half blend and half value. So basically he ends up with value-tilted portfolios, and that carries through to like all of the other asset classes, whether they're international, US, or something else. If you look at his 10 fund portfolio and his four-fund portfolios and his two fund portfolios, they all have this same basic characteristic that half of it is in a blend fund and half of it is in a value fund. But I think you need to appreciate the difference between what he's trying to do and what we're trying to do here. What he is trying to do is come up with portfolios that outperform in terms of long-term returns and outperform the regular total market funds. That's what he's trying to do. We're not trying to do that here. This is something that people have difficulty appreciating that the goal of creating a portfolio with a higher safe withdrawal rate and the goal with creating a portfolio that has the highest long-term return are two different goals. They're two different goals. They're related and there's overlap. But what we are doing also accounts for volatility in the portfolio and accounts for the fact that you're taking money out of it. And when you are accounting for those factors, you get to slightly different results. And so why we care about having value in the portfolio is not because we think small cap value is going to outperform the rest of the market. I don't think that. And I don't care. I would assume that it would perform similarly to the rest of the market. And get this: if small cap value is not outperforming the rest of the market, then something else has to be performing better. And that something else is probably going to be the thing that's the most different. It's probably going to be something like large cap growth.

Voices [24:56]

That was weird, wild stuff. I did not know that.

Mostly Uncle Frank [25:00]

So what we really care about here is slicing up the stock portion of the portfolio such that you have holdings that are performing differently at different times. And the easiest way to do that is to separate growth from value. And if you just want to do it with two funds, the easiest way to do that is to have a large cap growth fund or something similar to it, such as a large cap total market fund, and then pair that with a small cap value fund. But you can use all kinds of other different kinds of value if you'd like. And what you are preparing for when you're doing that is for years like 2001 to 2003 and years like 2022, when the stock market is going down and performing badly, usually growth is doing a whole lot worse than value, like 20% worse or more. If you know that, you know that there's a rebalancing opportunity in that. That when growth really crashes a lot, you're able to sell some value and sell some other things in the portfolio and then buy more of the growth stocks when they're low. You sell high and you buy low.

Voices [26:09]

Think big, think positive, never show any sign of weakness, always go for the throne. Buy low, sell high. Fear, that's the other guy's problem.

Mostly Uncle Frank [26:18]

That's the purpose of rebalancing. That is an application of what is called Shannon's Demon, which is a mathematical concept and why you get a performance bonus out of diversification if it's accompanied by rebalancing.

Voices [26:35]

Yeah, baby, yeah.

Mostly Uncle Frank [26:38]

And that's what we're doing here.

Voices [26:40]

This is how we do it.

Mostly Uncle Frank [26:48]

Now, Paul Merriman's not trying to do that. He's trying to find things that actually outperform the rest of the market. And if you look at the actual strategy he's adopted for drawing down on, it's simply to underspend the portfolio. If you listen to his interviews and descriptions, he elected to work until age 70 so that he would have essentially twice as much money as he needed for retirement. And that is a very common strategy for people in traditional personal finance. They're over savers. And if you do that and then just have a really low withdrawal rate, that's 3% or less, you don't have a problem. I mean you're gonna end up with a whole lot of money at death if you don't find a way to give it away before then.

Voices [27:30]

Death stocks you at every turn. Grandpa? Well it does.

Mostly Uncle Frank [27:36]

But that is one way to solve the retirement problem is to work longer than you actually need to and save a whole lot more money than you actually need. And that works. Now that's not my choice. Instead of retiring at 70 like he did, I chose to retire at 55 and have a portfolio that allows me to spend more money. So I have those extra fifteen years. I thought having the extra fifteen years of retirement was more important than oversaving and underspending later in life. You may disagree. But that's a choice we all have to make, and we all do make whether we acknowledge we're doing it or not.

Voices [28:18]

Oh, where were we?

Mostly Uncle Frank [28:22]

For more on this, go back and listen to episode 401 of this podcast, which goes into more detail about the difference between people who are trying to maximize returns and people who are trying to maximize a safe withdrawal rate.

Voices [28:40]

Nothing you have ever experienced can prepare you for the unbridled carnage you're about to witness. Super vulnerable, the world's scary, they don't know what pressure is. In this building, it's either kill or be killed. You make no friends in the pits and you take no prisoners. One minute you're up half a million and soybeans in the next boom. Your kids don't go to college and they've repossessed your bent. Are you with me?

Mostly Uncle Frank [28:57]

Because these are very interesting philosophical questions, but they're also interesting financial questions because personal finance is finance first. That's your financial behaviors should match your financial goals. And your financial behaviors also imply certain goals. That's what economists call a revealed preference. So you might want to make sure you're choosing the financial goal first and then adapting the behavior to that, as opposing to picking a financial behavior that sounds comfortable or convenient, which may not actually match a goal you actually have. Something for you to ponder.

Voices [29:43]

Is the coma painful? Oh heck no! You relive long lost summers. Kiss girls from high school. It's like one of those TV shows where they show a bunch of clips from old episodes.

Mostly Uncle Frank [29:58]

I'm sorry, I don't know all the And outs of how Avantis structures its funds or how Paul Merriman chooses to label them. But hopefully that helps some. And thank you for your email.

Speaker 14 [30:11]

Aren't you Patrick Star? Yep. And this is your ID. Yep. I found this ID in this wallet. And if that's the case, this must be your wallet. That makes sense to me. Then take it. It's not my wallet. Can you take hats in a dignified and sophisticated manner?

Voices [30:32]

You mean like a weenie? Okay. May I take your hat? May I take your hat? May I take Alright, I've heard enough. You've got the job. Last off.

Mostly Uncle Frank [30:46]

Last off? We have an email from Shushi.

Mostly Queen Mary [30:50]

No way.

Mostly Uncle Frank [30:51]

And Shushi writes?

Mostly Queen Mary [30:53]

Hello, Frank. First, thank you for sharing your work and passion. It was a significant influence for me as I worked on my Fi plan. I reached Fi recently and now going through the reality of being in drawdown mode. While I've read information from a lot of people that contribute to the Fi community, yours in particular was extremely valuable as I think about the drawdown stage. There is one question I can't find any good information on though, and I hope this email catches your attention amongst many others that I'm sure you receive. My question is, once I'm drawing down, how do I keep an eye on when it might be necessary to make a change to my plan, hopefully temporarily? The Monte Carlo simulations and stress testing against historical performance are great at percentage of success, etc., but obviously there is always a chance, however small, of the plan trending toward a negative direction. I've in the past figured that I could keep a copy of the simulation output with portfolio values for the 10%, 75%, and 90% probabilities, and track my actuals against that to see if that is happening and make an adjustment accordingly. And Bill Bangin's book proposed something along those lines as well, tracking actual versus projected withdrawal rate. I like the idea of this as a rate because while I understand starting the withdrawal rate and adjusting for inflation annual, I'm nervous how to think about portfolio value for a given year before just blindly withdrawing what the number is. The part I'm confused about though is that MC and other analyses typically don't account for the fact that we already know that stock valuations right now seem high. Should those analyses be adjusted based on that? Or it doesn't matter. And is what I'm thinking a good approach, or is there a simpler solution? Thank you, Sushi.

Voices [32:53]

That was a shot. A puff of smoke. We ran like the chicken. And that's how we got here. Wow. Yeah, well, something like that.

Mostly Uncle Frank [33:04]

The simplest solution to making unanticipated adjustments in your retirement plan is simply to spend less money. And you can actually cut your spending, or you can cut your personal inflation rate and commit to not inflating the amount of money you're spending for a year or a series of years. That is the simplest way to go, and that is in fact the way most people actually approach this in real life. Now you can formalize that by using things like guardrails, a guite and clinger kind of strategy. I will link to the portfolio charts retirement spending calculator in the show notes, which also describes a set of different guardrails kind of strategies and allows you to play with those sorts of things if you want to see how they play out. But Morningstar has found that such strategies tend to add about 1% or more to a safe withdrawal rate, depending on how you implement them. I think the foregoing inflation adjustment strategy is the easier one to implement, and that can add between about 0.5 and slightly over 1% to an effective safe withdrawal rate. And that is also in line with what people actually do, that they tend to spend less money as they go through retirement. I can tell you that our nominal spending has dropped since we retired, and it's mostly due to lower tax bills and getting all of the children off the payroll. And I anticipate further drops in our spending future. We at some point are going to downsize this large house we live in. We currently support my parents and they are not going to live forever. So chances are that is your easiest solution, particularly if you devised a plan like we did to anticipate some level of inflation when we're actually experiencing deflation. Now you asked, when might it be necessary to make a change in your plan? Well, I would be looking to things like are you getting a result that historically has never happened before? And if you have, you know, a standard kind of two or three fund portfolio, you would expect a portfolio like that to have 40% drawdowns. So that would be normal for that kind of portfolio. If you're holding the kind of portfolio that we have around here, like a golden butterfly or a simple golden ratio portfolio, you expect to have drawdowns of more like max of 20%, in which case if you had a 30% drawdown, you would probably take some action, at least if that happened in a single year. But this is why one of my favorite calculators to look at on portfolio charts is what they call the drawdowns calculator, which shows you over the entire data set what is the maximum drawdown, both in terms of depth and in terms of length. And if you know that, just that, you can compare portfolios on their safe withdrawal rate, because the ones with the shallower drawdowns and shorter drawdowns have higher safe withdrawal rates than the ones with deep drawdowns or long drawdowns.

Voices [36:03]

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

Mostly Uncle Frank [36:08]

Which makes a lot of sense when you think about it. So if my current portfolio had some kind of a drawdown that was like 30% plus, and I thought it was going to last more than three or four years, that would be outside my expectations, and so I probably would take some action on reducing spending in some way. It's probably what I'd would do. But in order to know that, you do need to know something about the history of what you're holding. And as odd as it seems, I see a lot of people who never go look at the actual history of what they're holding. And uh I'll go ahead and make sure you get another copy of that memo. Okay. Instead, they look at crystal balls or guesses or tell stories about why what they're holding is not going to have a huge drawdown anymore. And that's really not a good approach.

Voices [36:55]

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

Mostly Uncle Frank [36:59]

So if you don't know what the deepest drawdown and longest drawdown is for whatever retirement portfolio you're holding, you just haven't done enough homework. You need to go figure that out. It's not that hard, but a lot of people just never do it.

Voices [37:12]

I've officially amounted to check you squat.

Mostly Uncle Frank [37:18]

Now you could also do some of the other things you suggest, like running a Monte Carlo simulation every year. But honestly, you really don't want to have this planning or these planning kind of rules dictate the way you live your life and your actual spending. It's one thing if you are just reducing some excessive discretionary spending based on some newly updated Monte Carlo simulation or whatever. But it's another thing if you're cutting into things that are actually important to you. So be careful that you're not coming up with some plan that is so mathematically rigid it causes you to not live your best life, essentially.

Voices [38:00]

That's not an improvement.

Mostly Uncle Frank [38:02]

After that, I would say run whatever tests make you feel comfortable. Because some people just like to run lots of tests and it makes them feel more comfortable.

Voices [38:13]

As you can see, all communication is shut off. In spite of our mechanical magnificence, if it were not for this continuous stream of motor impulses, we would collapse like a bunch of broccoli. In conclusion, it should be noted. Give him an extra dollar. An extra dollar, yes, sir. That any more than common injury to the nerve roots is always serious.

Mostly Uncle Frank [38:52]

Just make sure you are not injecting unrealistic assumptions into any of these tests that you're running. Because that's the biggest problem with calculators, is people not using base rate assumptions but making up other things.

Voices [39:07]

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

Mostly Uncle Frank [39:10]

And then the final question you had had to do with stock valuations being high right now and whether our calculations should be adjusted based on that. And the answer is no, at least not just based on that. If you do read a lot of Bill Bangin's book and then his follow-up research, he's been unable to attach a forecasting mechanism strictly to valuation metrics. When he added inflation, that seemed to be a more important metric to be adjusting safe withdrawal rates on. And the thing you need to understand is that he wasn't adjusting them down for high valuations or high inflation. He was adjusting them upward for low valuations and lower inflation or normal inflation because the worst case scenario happens to be the inflationary scenario of the late 1960s and 1970s. The way we really deal with the alleged threat of high valuations in one of these kind of portfolios is diversification. We're not just holding a large cap total market fund or SP 500 fund or that combined with a total international fund. That is not adequate diversification if you want to have a high safe withdrawal rate. The way we solve that is by tilting or having value-tilted funds in the portfolio partially on the stock side of things, because that automatically reduces the valuation of your portfolio. Your portfolio. You don't have to have a portfolio that has the same valuation metrics as the total market portfolio. And you shouldn't want that kind of thing if you are drawing down on it. What you want is something with a lower valuation to begin with, and you can create that by adding value-tilted funds to your portfolio, which is not that hard. The other way you get around this is by having other assets that are not stocks in your portfolio, including not only treasury bonds but alternatives. So to the extent high valuations are an alleged problem, that is how we solve the problem with a better portfolio. Not by not spending money or going into fear-mongering or trying to predict things using cape ratios.

Voices [41:27]

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

Mostly Uncle Frank [41:36]

Because people who have tried to predict things using valuation ratios have been wrong over and over again, especially in the past fifteen years or so.

Voices [41:46]

This is the one that I tend to use more often. I have a calcite ball and I have a black obsidian one here. A really big one here, which is huge.

Mostly Uncle Frank [42:01]

And the only question is why. I will link to a nice short article by Michael Batnick, which explains that. But the answer is it's probably not a problem, and if it is a problem, you solve it with diversification, not with not spending money. Hopefully all 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 RiskParodyRadio.com. That email is Frank at RiskParodyRadio.com. Or you can go to the website, www.riskparodyradio.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 with 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.