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 are new here and wonder what we are talking about, you may wish to go back and listen to some of the foundational episodes for this program. And the basic foundational episodes are episodes one, three, five, seven, and nine. Yes, it is still in my memory, thanks. We have also created an additional resource, a collection of additional foundational episodes and other popular episodes.

Voices [1:07]

We have top men working on it right now.

Mostly Uncle Frank [1:14]

Top men. And you can find those on the episode guide page at www.riskparty radio.com. Inconceivable! And all thanks to our friend Luke, our volunteer in Quebec. Zach Ok We'd be helpless without him.

Voices [1:36]

I have always depended on the kindness of strangers.

Mostly Uncle Frank [1:41]

Because other than him, it's just me and Marion here. I'll give you the moon, right?

Voices [1:46]

I'll take it.

Mostly Uncle Frank [1:48]

We have no sponsors, we have no guests, and we have no expansion plans.

Voices [1:53]

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

Mostly Uncle Frank [1:55]

Over the years, our podcast has become very audienced focused, and I must say we do have the finest podcast audience available.

Voices [2:05]

Really top drawer.

Mostly Uncle Frank [2:07]

Along with a host named after a hot dog.

Voices [2:10]

Light in the Francis.

Mostly Uncle Frank [2:14]

But now onward, episode 490. Today on Risk Party Radio, we're just gonna do what we do best here, which is attend to your emails. But before we get to that, we're gonna have ourselves a little Queen Mary segment. Because as most of you know, we are raising money in March and April for Fairfax Casa, which is Mary's charity. That's the court appointed special advocates. We've been talking about that for the past few episodes here. Mary would like to thank all the donors that have already pitched in. And we have another little special segment for you that you'll hear about in a minute. And so without further ado.

Voices [3:24]

As you wish. As you wish was all he ever said.

Mostly Uncle Frank [3:32]

And so, Mary, can you speak to our listeners and tell them about how the campaign is going so far?

Mostly Queen Mary [3:38]

I want to take a moment to give a huge, heartfelt thank you to those of our listeners who have already made donations to Fairfax Casa. I really didn't expect to be getting many donations until March and April, but I'm absolutely overwhelmed with the generosity of those of you who have given so far. Your donations are helping vulnerable children to find safe, permanent, and loving homes. And I'm so gratified that this community is making that kind of impact. Thank you so much for being heroes to the children we serve.

Mostly Uncle Frank [4:08]

And so, yes, we are both very grateful for everyone's support of Fairfax Casa.

Voices [4:18]

Just for one day. Death stalks you at every turn.

Mostly Uncle Frank [5:07]

Or some young Turk with a spreadsheet and an engineering job talking about all the machinations they were going through to get to financial independence.

Voices [5:22]

What do you think, Abdul? Can you give me a number crunch real quick? Uh yeah, give me a sec. I'm coming up with 32.33 uh repeating, of course, percentage of survival.

Mostly Uncle Frank [5:35]

She's always been focused on using finances and frugality just to live a better life overall. And she has a relatively new book out called Retire Often, which is about taking many retirements or sabbaticals and how to go about doing that and negotiate with your erstwhile employer and such things.

Voices [5:55]

The first rule of fight club is you do not talk about fight club. Second rule of fight club is you do not talk about fight club.

Mostly Uncle Frank [6:06]

Which I'll link to in the show notes. But the reason she's here with us today is because she is a mom, a parent, many times over by adoption, and has experience with her foster system out in Montana and the CASA that she worked with out there. So we thought we would ask her to say a few words about her experience with court-appointed special advocates and what they do. And so now here she is. So I'm here with our friend Gillian Johnsrood, who just wrote a book called Retire Often, which you should all go out and buy. But we are here today for her to tell us about her experience with her local CASA in Montana. Gillian is an adoptive mom several times over. And so she's got a lot of experience in the foster system in Montana and dealing with it. Jillian, could you just tell us a little bit about your experience with the foster system and your CASA in particular?

Voices [7:04]

Yeah, our CASA was really instrumental in, I mean, doing exactly what they're supposed to do, being an advocate for the kiddos. So we eventually adopted a sibling group of three kiddos, all have siblings, but they had had numerous placements, a lot of disruptions. So they had been with different families over the, they'd probably been in care for maybe two years. And they had gone through, I think, three case managers at that point. The time that they were with us, they went through another four case managers. So they had gone through like seven case managers, a number of families. And the CASA was literally the only person who knew their story from the beginning when they got placed into care through adoption. She was the only one that had that continuous picture. And even their case files, you know, I feel so bad for the case workers. They they sign up and they get, you know, 20 different cases. And when I went to finally get to see the case files, it's like in linear feet, probably seven feet of papers. Wow. So a caseworker just doesn't get to even read all of the case files for all of these kiddos. So the Casa really was able to advocate for the kids in a way that no one else could because no one else knew the story like she did.

Mostly Uncle Frank [8:27]

What was her name?

Voices [8:28]

Nicole. Yeah. And she cases are just, I think they're just the most saintly people, but also she was so feisty. And you have to be a little feisty, I think. Like you have to be really sweet. But she was so strong and so fierce and just so passionate for the kids' well-being that when we adopted our kiddos, we have one girl who is very feisty. She was feisty as a two-year-old and she is in junior high. And oh my God, she's still so feisty. But we changed her middle name to Nicole after our casa worker because yeah, that Casa Worker made all the difference in those kids' lives.

Mostly Uncle Frank [9:08]

That's wonderful. So, how long did that process take that when you were working with the casa on the adoption?

Voices [9:15]

Oh, geez. So they had been in care for off and on for I guess two years. And then we adopted them, it might have been a year and a half after they were placed with us. So that full journey for them was, yeah, probably about three and a half years, which as like a volunteer gang, that's a long, you know, it's a long stretch of time start to finish. So they're they're volunteers who have to be incredibly dedicated. You know, we had like 14 appointments every week with various professionals, and she showed up for a lot of stuff. Like we we saw her frequently, and she went to whether sometimes doctor's appointments or visitations with birth families, or you know, she attended the whole variety of things to really understand the kiddos' needs and what would be best for them.

Mostly Uncle Frank [10:03]

Well, that's wonderful. Thank you for sharing that with us. The Casas do a lot of great work, and Mary's had a similar experience, and we're very grateful for that you could come on and tell us about your story. Anything else you'd like to add?

Voices [10:18]

Yeah, I I guess just the work they do is so important and it's so difficult. And it's like, it's such a crazy volunteer gig. Like it's so, it's such a ridiculous ask. And honestly, I tell people when they want to be foster parents or adopt from foster care, it is unreasonably hard. Like you're doing a thing that is not within normal human reason, and you'll be asked to do things that are not reasonable at all. And and the cost isn't that same gig. Like it's unreasonably hard what they have to do and like what they have to carry for these kids. And so any support that they can get, like any encouragement that they can get is so is so needed because they're doing an unreasonably hard thing.

Mostly Uncle Frank [11:02]

I agree. I agree. Uh well, thank you for spending some time with us to tell us about this today.

Voices [11:07]

Thanks for having me. Always good to see you.

Mostly Uncle Frank [11:10]

Well, it's good to see you too, because you know, we don't have any guests on this podcast, so you're like a unicorn.

Voices [11:16]

No, I'm so excited.

Mostly Uncle Frank [11:21]

Well, thank you again.

Voices [11:24]

Unicorns, unicorns, unicorns, yeah. I love you. Unicorns, unicorns, unicorns, yeah, and all the things you can do.

Mostly Uncle Frank [11:36]

Well, now that was really nice. And I hope it inspires you. A few more of you to continue to make your donations to Fairfax Casa. We will link to that again in the show notes to make it easy for you. And just as a reminder, if you do donate to Fairfax Casa, you get to go to the front of the email line, even before the donors to the Father McKenna Center. So let that be your incentive. And now I think it's time for those emails. So let's get going here.

Voices [12:04]

Here I go once again with the email. And first off.

Mostly Uncle Frank [12:10]

First off of an email from Connor. There can be only one. And Connor writes.

Mostly Queen Mary [12:18]

Frank and Mary. See below screenshot of my donation receipt to Fairfax Casa made in honor of Mary and Risk Parity Radio.

Voices [12:27]

100 billion dollars.

Mostly Queen Mary [12:31]

Thanks to you both for doing such productive work with your charitable endeavors and the podcast. I have a couple of questions if you wouldn't mind sharing your thoughts. Question two is the one I'm most hoping you weigh in on. One, is the fund with the ticker SCHG suitable for one's large cap growth allocation? For various reasons unrelated to the holdings, this fund is preferable to me. Two, could Frank share some wisdom on what it takes to succeed as a big law attorney? I'm about to begin working as an associate at a similar law firm to that from which Frank retired.

Voices [13:06]

Ha ha, you fool! You fell victim to one of the classic blunders.

Mostly Queen Mary [13:10]

I want to position myself for success and hopefully enjoy a long, sustainable career.

Voices [13:17]

You get nothing back for all you say, just determining an asphyxia.

Mostly Queen Mary [13:24]

Frank seems to have enjoyed an unusually long tenure for Big Law, and I hear many horror stories about what it is like to be an associate in this environment.

Voices [13:37]

Talkamada, do not beg him for forgiveness. Talkamada, do not ask him for mercy. Let's face it, you can't talk a mata anything.

Mostly Queen Mary [13:48]

Again, thanks for all the great content, Connor.

Mostly Uncle Frank [13:53]

Well, Connor, thank you for being a donor to Fairfax Casa. It has moved you to the front of the email line.

Voices [14:01]

You must learn to conceal your special gift and harness your power. Until the time of the gathering.

Mostly Uncle Frank [14:14]

And getting straight to your questions. First one is SCHG, a suitable large cap growth fund? And the answer is Yes! Yes, it's Schwab's version of a large cap growth index fund. It's similar to something like IWY, which is the iShares version, or VUG, which is the Vanguard version. All of these are investing in similar companies. And the real differences have to do with how many companies they put in their fund. So which one will do better in any given decade is kind of a crapshoot. In the past decade, the ones that have been more concentrated in the biggest companies have done better, just so you know, but that's not always the case. But if you like that one, please do use it. It does get me to a kind of side observation here, which is that there are many, many funds that do the same kinds of things now, many, many different ETFs. And what you're really interested in is are they investing in the same things or not? And then what are the fees? Most of these have really cheap fees, so it's not really an issue. But you can compare the holdings and other things over at Morningstar. If you just put the funds in there and look at the portfolios tab, you'll get a lot of information there, including the top 25 holdings of all these funds. And what that really means is you should never be wedded to only one company's funds. I know that's what the companies want you to do. Vanguard only wants you to buy Vanguard funds, Schwab only wants you to buy Schwab funds. Fidelity's a little different. They don't mind if you buy somebody else's ETFs for the most part, but they want you to buy all of their mutual funds. And of course, iShare's BlackRock prefers theirs, and then there are hundreds, if not thousands, of other fund providers. But you really just need to be comfortable looking past brand names and looking at what these funds are really doing and what they cost, because you'll find that there are, at least for the sector funds and the factor funds, like a large cap growth or a small cap value, there are many different options. But when you are looking at large cap or cap-weighted funds in particular, those are all going to be very, very similar because they all end up holding large allocations to the same companies. Which is different from small cap value funds, like we talked about in the last episode, and I won't belabor here. Go listen to that bigger pockets episode I did on small cap value funds that we referenced in the last episode if you're interested in that. Alright, moving to question two, which is of more interest to you. What does it take to succeed as a big law attorney?

Voices [16:56]

What you just said is one of the most insanely idiotic things I have ever heard.

Mostly Uncle Frank [17:03]

Well, I suppose a variety of traits, if you're thinking about climbing the ladder as an associate and becoming a partner, I would say mostly stamina and fortitude over the years.

Voices [17:17]

The beatings will continue until morale improves.

Mostly Uncle Frank [17:21]

Because it is just a very time-consuming and mind-consuming job, if you're going to do it at a high level. Because you are expected to kind of be available 24-7 or something akin to that. First from your senior attorneys when you're climbing the ladder, but then when you start working directly with clients, believe it or not, it gets even worse. The old joke in big law is that becoming a partner in a big law firm is like winning a cake eating contest where the prize is more cake.

Voices [17:51]

Let them eat cake.

Mostly Uncle Frank [17:54]

I think the next thing you need to develop is good communication skills. A lot of very smart people come out of law schools without having a lot of work experience and not used to communicating with a lot of different people on sort of different levels. Because to get promoted at a big law firm, you not only have to be really good at what you do, the people you work for have to like you and want you around. And so if you're difficult to work with, you're probably not going to succeed or not be more likely to succeed than somebody that's easy to work with. Your senior attorneys want to know that when they bring you to a meeting to report on some project or something, you're going to be able to communicate things, you're going to show up on time, you're going to be ready, all that reliability stuff. That's what's really important to gain a reputation as a junior attorney in a big law firm, as to be somebody who's really reliable, does good work, and that you don't have to chase after or wonder whether they're going to be able to do the job or not. I think you also really need to be curious about your work and at least like some portion of it. There's a lot of things not to like about working at big law firms. But it does come down to the question of do you like working on these kinds of projects? Now, for me, it was fortunate that I got involved in a lot of international cases, international arbitrations, and things like that. So I got to run all over the world and meet all kinds of people and participate in all kinds of hearings and things. But what I was really curious about to begin with was advocacy, particularly advocacy in courts or in arbitration hearings. So while I was grinding away as a junior associate on the side, I was also coaching the mock trial team at Georgetown and then started teaching trial practice there about seven years into my legal career. Mary and I are still teaching that there. And because I was curious about that and developed skills in that, when it came time to deciding which associate was going to get the witness, I was ready to take that on. But if I hadn't been curious about part of my job and been interested in pursuing that, it probably wouldn't have worked out that well.

Voices [20:08]

Never overextend your trust.

Mostly Uncle Frank [20:33]

Because one thing you cannot predict is what's going to be the next hot practice area that the law firm wants to expand its practice in. I did not start out in international arbitration, for example, but in the 1990s, that was a growing practice area. And so when I got involved in it, there were many more opportunities to do a lot more things, and the firm was interested in growing that area of the practice. That's not true of every practice. It's not going to be true of every practice you go into. So you also need to be conscious of the business case for whatever it is you are actually doing or working on, and whether your firm is interested in growing that practice or not, which is generally completely out of your control, but you just need to be aware of it. What is in your control is you can pivot and choose to do something else if you don't think it's really going to go somewhere.

Voices [21:26]

Never lose your temper. If your head comes away from your neck, it's over.

Mostly Uncle Frank [21:34]

So I think that's probably enough advice about Big Law for one episode, particularly on some podcasts that's about personal finance. Hopefully, I haven't lost most of my audience by this time.

Voices [21:49]

Rex quando we use the buddy system. No more flying solo. You need somebody watching your back at all times.

Mostly Uncle Frank [21:57]

I would say if you're just getting started there, just Focus on being a good employee and somebody people want to rely on and want to work with. Because that's really all they're looking for at the beginning. Big law firms realize that junior associates do not have a whole lot to offer in terms of expertise. And yes, there is kind of a Hunger Games quality to it for the first few years because probably half of the people you start with will be out of the law firm and maybe even out of the law within the first three to five years. That's just the way things work.

Voices [22:32]

Two men enter, one man leaves.

Mostly Uncle Frank [22:37]

But if you're still standing by then and you've built some relationships within your firm and have a good reputation for being somebody that people want to work with, you'll be on your way.

Voices [22:57]

I'm on my way from Medsterita Happy Destiny. Uh-huh.

Mostly Uncle Frank [23:06]

And if you decide it's not for you, recognize that too. Give it a few years. Maybe you'd prefer to be doing something different. And that's going to be okay too. Give yourself some grace.

Voices [23:17]

I'll tell you how risky life is. You're not going to get out alive. That's risky. The Englishman says, well, if that's the way it's going to work out, let's give it a go. Right, that's what it's for. Give it a go.

Mostly Uncle Frank [23:34]

Just make sure you have a provision for paying off those law school loans if you've got them. Because that's what drew me to big law to begin with, believe it or not. And I never intended to stay at the firm that long. At least when I started. But it grew on me, and perhaps it'll grow on you too. Anyway, thank you for writing in. Look forward to hearing from you again. Thank you for being a donor to Fairfax Casa. And thank you for your email.

Voices [24:49]

Second off.

Mostly Uncle Frank [24:51]

Second off an email from Zachary.

Voices [24:55]

A question. Since before your son burned hot in space, and before your race was born, I have awaited a question.

Mostly Uncle Frank [25:09]

And Zachary writes.

Mostly Queen Mary [25:11]

Hi Frank and Mary, thank you so much for the podcast and the education you provide. Top drawer retirement hobby. Also, thanks for highlighting a great organization like the Father McKenna Center. Donation attached. Wow, is it very nice? My question is around developing these risk parity style portfolios. I think I understand the basic concepts. I even made a presentation to my engineering friends at a personal finance weekend getaway of these concepts and your podcast.

Voices [25:40]

A very sick man.

Mostly Queen Mary [25:42]

Which was an excuse to hang out and enjoy adult beverages, but also gain some financial wisdom. I am a scientist, not a philosopher. How do you determine which of the many alternate assets to include in a portfolio and in what proportion? Stocks drive returns, and long-term treasuries provide negative correlation and downturns. But how do you decide to include gold next over managed futures or something else? I know there is no one right answer, but what framework do you use to decide what to include and in what proportions? Thanks again to both of you. Cue Random Star Trek Soundbite just because.

Voices [26:22]

Are you machine or being? I am both and neither. I am my own beginning, my own ending. I see no reason for answers to be couched in riddles. I answer as simply as your level of understanding makes possible.

Mostly Uncle Frank [26:42]

Well, Zachary, first off, thank you for being a donor to the Father McKinnon Center. Just to toot that horn a little bit, as most of you know here, we typically raise money for the Father McKinnon Center, which serves hungry and homeless people in Washington, D.C. Full disclosure, I'm the board of the charity and I'm the current treasurer. If you give to the charity, you get to go to the front of the email line, as Zachary has done here. Except the people who are donating to Fairfax Casa, at least for March and April, get to go ahead of you.

Voices [27:12]

Mary, Mary, I need you hugging.

Mostly Uncle Frank [27:20]

But still, it's a good deal. And I'll provide that link in the show notes. And you can also do it through our support page at www.riskperivor.com.

Voices [27:30]

And uh I'll go ahead and make sure you get another copy of that memo.

Mostly Uncle Frank [27:34]

Okay. Getting to your email, yeah, this goes to some of the fundamental ideas of portfolio construction and where do correlations come from, if you will. Now we most recently talked about this in episodes 480 and 483, and you may want to go back and listen to those and look at some of the links. But this does go back to our foundational episodes, particularly episodes five, seven, and nine, I would say. We use the four quadrant method of analysis of assets that was pioneered by Ray Dalio and Bridgewater back in the 1990s, but that is commonly used by all kinds of portfolio allocators now. And that looks at sort of the universe of macroeconomic weather as being in four quadrants. And on one axis, you have higher or lower inflation, or I should say increasing or decreasing inflation. On the other axis, you have increasing or decreasing growth, which gives you four quadrants. You can have increasing growth and increasing inflation, decreasing growth, decreasing inflation, or they can be going in different directions. What you'll find is that different assets tend to perform well or worse in each of those different quadrants. And it's a probabilistic kind of thing. Just because you're in one quadrant doesn't mean some asset is 100% guaranteed to outperform or underperform there. But in general, you can say things like treasury bonds perform very well in decreasing inflation and decreasing growth environments. That's a recession. And that almost nothing else does in that environment. You can say things like managed futures tend to perform well in either high inflation environments or very low inflation environments, and don't do as well in moderate environments. Something like gold can perform well or badly almost in any environment, but typically performs best when other assets are not performing very well for whatever economic or geopolitical reason is going on. And what you really get out of this is that this time is always different as to what is actually causing the macroeconomic environment to occur. But the kinds of macroeconomic environments you experience are not different. Recessions are always like recessions. High inflation environments are always like high inflation environments.

Voices [30:00]

Lick an orange, it tastes like an orange. Lick a pineapple, it tastes like a pineapple. Go ahead, try it. The strawberries taste like strawberries. The snosberries taste like snosberries. Snosberries? Whoever heard of a snosberry. We are the music makers. And we are the dreamers of dreams.

Mostly Uncle Frank [30:21]

And if you know what the environment is, you could easily modify your portfolio to take advantage of that environment. The problem is you don't know which environment's gonna come next. That's what hedge funds actually try to do. They try to predict the next macroeconomic environment and then move their assets around to take advantage of whatever they think is gonna happen. For us amateurs, we're better off doing what's called naive diversification, where we just hold some assets that do well in all of these environments and then just rebalance them periodically. So we don't have to predict what's gonna happen next. We just know that whatever comes up, we're gonna have something that at least survives pretty well in that environment, even if other things are performing poorly. And the truth is about 70% of the environments are generally okay for stocks, and so you're not really worried about those. What you're more worried about are sort of 25 to 30 percent of environments that are bad for stocks, because that's your major driver of returns. And so that leads you to things like treasury bonds and alternative investments. So, as a practical matter, the way we generally think about building out a portfolio is that first we start with our stocks, because those are our major return drivers and seem to do a better job of it than most other things. We want to diversify those into growth and value so they're not overly concentrated in any one part of the market or any one kind of group or class of stocks. The next thing we pick is something that is going to be recession insurance, and that has historically been treasury bonds, and going back to the 1950s, every time there's a recession, the correlations between stocks and treasury bonds go negative. No, it's not negative all the time, and it's not negative for one 20 or 40 year period and then changes magically into something else. That's not how it works.

Voices [32:12]

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

Mostly Uncle Frank [32:16]

It works like if there is a recession, your treasury bonds will outperform when your stocks are likely to be underperforming. And then when you come out of it, you could have any other kind of correlation that you can think of. So getting to alternatives, what you're really interested there is finding things that are uncorrelated with both stocks and treasury bonds. And there just aren't that many things that fall into that category. Historically, gold has been one of those things, and we have hundreds of years of data, if not thousands of years, that support that.

Voices [32:49]

This is gold, Mr. Bond. I think you've made your point, Goldfinger. Thank you for the demonstration. Do you expect me to talk? No, Mr. Bond, I expect you to die.

Mostly Uncle Frank [33:01]

And note I said zero correlation. Gold is not negatively correlated with stocks or bonds. That doesn't mean that when stocks go down, gold's gonna go up, or when bonds go down, gold's gonna go up. That would be negatively correlated. They are uncorrelated, which means they could be moving together or apart at any given time. But over time, you will see them vary in performance, which allows you to do rebalancing mathematically. That is what's called Shannon's Demon. I will link to that article again, but that is the mathematical reason that when you hold uncorrelated assets and rebalance them periodically, you essentially get a benefit or bonus for doing that. And so even though the individual components of your portfolio may have higher volatilities, the overall volatility of your portfolio is less. That is the basic principle of Markowitz diversification and why you do it not only within asset classes, but across asset classes.

Voices [34:11]

This is how we do it. Forget about it.

Mostly Uncle Frank [34:22]

Because a good portion of the time they happen to be positively correlated.

Voices [34:26]

Real wrath of God type stock.

Mostly Uncle Frank [34:29]

And then what else are you going to do? So, as I mentioned in episodes 480 and 483, managed futures has a very long history of being uncorrelated also with both stocks and bonds, and tending to perform the best either in serious recessions like 2008 or in serious inflationary periods like 2022. And that's because it follows trends in interest rates and other things and can also go short assets as well as long assets. Now, as it turns out, we haven't found many other things out there that consistently have these kinds of characteristics in that they are both uncorrelated with both stocks and bonds. A lot of the other kind of alternative asset classes that people talk about, particularly things like private equity and private debt, those are correlated with public equity and public debt. So don't kid yourself. That's a whole marketing shtick where just because they don't price them regularly, they can essentially fiddle with the data and call them uncorrelated. Those things are correlated with their public counterparts. There are other things like long short strategies and any other kinds of strategies like carry and other things that may or may not be correlated with stocks or bonds, and we don't have a lot of data, unfortunately, on some of these things. There's a nice little video I just saw recently put out by the fund providers for DBMF talking about a correlation analysis from Morningstar, showing that most of these other alternative strategies tend to be positively correlated with stocks. So in terms of being a diversifying asset, which is what you really want them to be, they're essentially just not as good as something like managed futures or gold.

Voices [36:12]

That's the fact jack! That's the fact jack!

Mostly Uncle Frank [36:16]

There are other asset classes that have a different problem, namely something like investing in volatility, like VIX futures or something like that. And those are designed to be uncorrelated with the stock market just by the way they are constructed. But the problem with a lot of those kind of assets is they have a negative expectation, and so they drag the portfolio down most of the time. You do want things with a positive expectation, and something like managed futures or gold tends to have a positive expectation and a return profile long-term that is somewhere between stocks and bonds. So that's another criteria you need to have that your alternative asset can't be something that is going to drag the portfolio down most of the time. Now, as for which one is better, gold or managed futures for this purpose, the answer is I don't know.

Voices [37:07]

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

Mostly Uncle Frank [37:13]

But they do tend to be relatively uncorrelated with each other, believe it or not. Managed futures will be positively correlated with gold when it picks up a positive long-term upward trend in gold, but it could be negatively correlated if it picks up the downtrend in gold in some years. And most of the other things that managed futures invest in are not gold. They're currencies and interest rates and other commodities and even stock indexes worldwide. So rather than guessing at which one of those might be better than the other one in the next period, I think it's more prudent just to hold some of both because they do have a similar return profile as well. Even though it looks like gold is outperforming everything and has outperformed the stock market in this century. If you're thinking about decades and decades of data, you would not expect that to be the case all the time. Now, as for which proportions, that depends on what your goals are really for the portfolio. The reason we focus on the kind of proportions that we talk about here a lot of the time is that we're looking for portfolios that have the highest safe withdrawal rates, projected safe withdrawal rates. And so that leads us to particular proportions. But now if you are just interested in accumulation and you don't care about volatility and you're going to be putting more money into this portfolio for a long period of time, you're not going to have alternatives. You're not going to have bonds. You're probably just going to have all stocks. And if you do have a diversified portfolio, you're probably going to put some leverage into it because you're most interested in something else. You have a different goal. So that is how you decide what kind of portfolio to construct and the proportions to use. You need to figure out what your goal is for the portfolio and then construct a portfolio that has a history of performing that way. And performing that way over long periods of time. Because anything less than 25 years is not much of a test, if you will. So I invite you to check out those earlier episodes, both the foundational episodes, and then episodes 480 and 483, and a lot of the other things they reference in there, including the ones talking about our four quadrant model. And then you'll understand where the secret sauce comes from. So hopefully that helps. Thank you for being a donor to the Father Beketa Center. And thank you for your email.

Voices [39:38]

Unlike you, we don't have to full of unpredictable emotions. The logic cannot stop. That could have been so long ago I have forgotten. You are not programmed.

Mostly Uncle Frank [40:22]

Last off?

Voices [40:23]

We have an email from Brian. No, no, no, no, no, Brian. No, no. You win. You win. I quit. It's your liver. You do whatever you want. Well, thank you. And Brian Wright.

Mostly Queen Mary [40:34]

Hi, Frank and Mary. I'm a newish regular listener of Risk Parody Radio. Finding your show at a perfect time in my life last fall.

Voices [40:43]

If you don't start making more sense, we're gonna have to put you in a home. You already put me in a home, and we'll put you in a crooked home in 60 minutes. I'll be good.

Mostly Queen Mary [40:53]

We made a contribution to the Father McKenna Center attached, so thank you for the work you do on both fronts. The show has been so impactful for how I think about portfolio construction and drawdown planning. And I love the audio clips. First, some context. Me, 44, wife 42, kid 1, 9, kid 2, 6. Portfolio is golden ratio based. Current portfolio covers current expenses at a 5% withdrawal rate, but we are expecting specific future expenses as detailed below. These expense projections have additional costs not in our current expense structure. Higher health care costs from non-employer subsidized plans, we may be conservative here with ACA plans, car replacements every five years, both cars are owned outright, projected house repairs, future gifts to our two kids. Ultimately, this led us to determine we are between 10% low-end and 30% very high end below our retirement targets. Last fall, I was unexpectedly downsized from an executive leadership role. What would you say you do here? Rather than immediately jumping back into another high-stress position, I used the time off to reconnect with my family and really assess what I want out of work going forward. So are you gonna get another job?

Voices [42:24]

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

Mostly Queen Mary [42:52]

For one, I spent too much time early on watching the portfolio. The daily and weekly swings were unnecessary noise that added some undue stress, even if the overall portfolio is 15 plus percent higher since my time off started.

Voices [43:07]

That's what I'm talking about.

Mostly Queen Mary [43:09]

Overall, this situation combined with shifting my focus from a 4% planned withdrawal to a 5% planned withdrawal with a risk parity style portfolio led me to consolidate most accounts at Fidelity and implement a golden ratio portfolio. Shifting my target size, a 25% change in withdrawal rate makes a big difference, as allowing me to intentionally pursue a lower stress individual contributor role. I love kung fu.

Voices [43:46]

Channel 39.

Mostly Queen Mary [43:47]

Totally. The compensation in this next chapter won't fully cover our household expenses.

Voices [43:58]

You know, I've never really liked paying bills. I don't think I'm gonna do that either.

Mostly Queen Mary [44:05]

So I've come to realize that what I'm doing is essentially some combo of Coast andor Barista fire, though the label doesn't really matter. We're drawing down from the portfolio to cover the gap with a 1.8% withdrawal rate during this time.

Voices [44:20]

Well, let's start the insanity.

Mostly Queen Mary [44:22]

I'm estimating two to five years in this phase, reassessing annually based on market conditions, portfolio balances, and work satisfaction, but could be longer if needed. So our plan is for a bit more portfolio growth to support that fuller picture at a perpetual withdrawal rate before I'm comfortable stepping away from earned income entirely. On the tax side during this phase, I'm planning to maximize contributions to our retirement accounts. Still figuring out Roth versus traditional, but the tax planning to and through early retirement book by Cody and Sean have been helpful. And HSA to minimize federal taxes on the earned income, which means the drawdown is coming from our taxable brokerage while tax-deferred and tax-free accounts continue to grow. I've watched the asset swap video and plan to use that approach for rebalancing. We might even be able to do some tax gain harvesting during these years, which would be great. I have a few questions from me, my wife Erin, and one about a specific planning situation. Specifically, any asset location considerations given that the taxable account is likely to be slightly depleted over two to five years while the others grow. Current withdrawal rate only on the taxable accounts is around 5.5%. Whether I should be thinking about the portfolio differently across accounts during this hybrid accumulation/slash drawdown phase, or just treat it as one unified portfolio and let the asset swaps handle the rest. My wife's question is about the current environment. Given the market volatility and uncertainty right now, she's wondering whether it would make sense to increase the gold and alternatives allocation beyond the standard risk parity targets.

Voices [46:03]

I love gold.

Mostly Queen Mary [46:07]

How far could we reasonably push those allocations before we're doing more harm than good? No, no crystal ball. The crystal ball can help you. I've run higher and higher gold and managed futures allocations at Testfolio, and the PWR seems to keep increasing even up to over 40% between the two asset classes.

Voices [46:29]

It's gold, Jerry, gold.

Mostly Queen Mary [46:31]

Even though the data supports it, I'm a little concerned about overdoing it here.

Voices [46:36]

Uh what? The money in your account. It didn't do too well, it's gone.

Mostly Queen Mary [46:40]

Finally, a planning question. We inherited a one-third ownership stake in a family vacation house. There's no debt on the property, and our share of expenses is relatively modest. Insurance, utilities, property tax maintenance, and repairs. We have five years of expense history to work from. I'm considering seeding a separate taxable risk parity account dedicated solely to funding these expenses in perpetuity, especially with an eye to leaving this property to our kids as part of our estate.

Voices [47:17]

Why? What have children ever done for me?

Mostly Queen Mary [47:20]

The debate is whether to fund it as a mini golden ratio portfolio at a 5% withdrawal rate, or go a little more aggressive with something like the OPRA portfolio, targeting a 6% withdrawal rate, knowing this is a small portion of our overall portfolio and we could always contribute more if needed. You have a gambling problem. Or are we overthinking it and the golden ratio just works as is across the board? Thanks again for everything you do with the show and the Father McKenna Center. Happy to provide more detail on any of this if helpful. Best, Brian.

Voices [48:01]

Oh my god.

Mostly Uncle Frank [48:02]

Brian, you're right. Well, first off, thank you also for being a donor to the Father McKenna Center. And that's why you have also moved to the front of our email line, or close to it. Getting straight to your questions. First one is whether there are any asset location considerations giving the taxable account is likely to be slightly depleted over two to five years while the others continue to grow. I would say no, not really. It's difficult to say much more about that without knowing the individual specifics about what are in these accounts. And also how you are tax managing them. But that also may play into kind of the order in which you sell assets and how you go about that. So if you need to do something that makes your allocation slightly off, but it's better for tax purposes, I wouldn't sweat it.

Voices [48:55]

And that as much as anything else led to my drinking problem.

Mostly Uncle Frank [48:58]

One other option you might consider, although I don't know whether it's worth the effort, would be to take part of your IRA money, move it to a separate IRA, and do a 72T SEP kind of withdrawal out of that, because that would be a way of getting money out of one of these other accounts. And if your tax rate is otherwise very low, that actually might make sense. The problem with that is you're going to have to continue that essentially until you're age 59 and a half. And since you're just in your early 40s now, that might be not worth all of the effort. But that is also an option in case you didn't want to deplete the taxable account and wanted to get money early out of the other accounts without paying a tax penalty on them. And you can actually learn about that in that book you've got from Cody Garrett and Sean Mullaney. So I would take a look at that and see whether it makes any sense. Your next question was whether you should be thinking about the portfolio differently across accounts during this hybrid accumulation slash drawdown phase, or just treat it as one unified portfolio and let the asset swaps handle the rest. I would think the answer is the latter for the most part. I think the only modifications I'd be thinking about would be maintaining more cash floating around in the taxable area or short-term bonds there simply because you're spending it and you want the liquidity. I don't really think it's going to matter if your withdrawal rate is 1.8%, as you state. But if it's that low, you can afford to keep a lot more cash around, and that may be more psychologically comfortable for you. As while it would detract from your very long-term growth, it probably won't make a big difference in the grand scheme of things.

Voices [50:50]

Stop calling me Shirley.

Mostly Uncle Frank [50:52]

Now moving to Aaron's question. The truth is there's always, or almost always, market volatility and uncertainty. That is a condition of financial markets generally. I do think it would be a mistake to over-allocate to something like gold or alternatives right now. But this is really an endemic problem of amateur investors overall. The number one reason that amateur investors underperform even their own assets is because they are chasing recent performance. And recent means anything between one and ten years. So five years falls squarely within that. And if you are making virtually any decision based on what is going on in the markets for the past one to ten years and adjusting your portfolio based on that, it's almost certainly going to be wrong.

Voices [52:09]

Wrong!

Mostly Uncle Frank [52:10]

And if it's right, it's luck. You've got to ask yourself questions. That you really need at least 25 years of data to be able to even say anything about what is likely to perform in the future and under what conditions. This does go back to that discussion of the four quadrant model and the fact that this time is always different in terms of what is actually going on in the world that's causing economic conditions to be what they are, but the economic conditions themselves don't have that many different variations to them. Now it's funny you mention gold in particular with respect to this, because what I'm seeing right now is everybody wants to invest in gold, and nobody wants to invest in treasury bonds or bonds in particular. And the reason for that is gold has done really well in the past five years. In fact, it's done so well that it's now outperformed stocks during the 21st century, and bonds have been terrible. Really, bonds had one terrible year in 2022, which was like the worst year in a hundred years, but for some reason people think that's going to repeat just because it happened recently. And that's a recency bias. So if I go back to 2022, you'll find emails that people sent me saying, Why are you investing in gold? Isn't that a foolish consistency? Gold hasn't done anything in like a decade or more. Shouldn't you abandon that? And then right after that, for the next few years, we've had the best performance since the 1970s in that asset class. And so what you're supposed to do, and what we have been doing over the past few years is selling lots of gold. Because you sell high, so you can buy low, and you live off your best performers when you're drawing down, not your worst performers.

Voices [53:58]

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

Mostly Uncle Frank [54:08]

So if you were to change your allocations based on the current environment, you are essentially injecting more volatility into your portfolio. And I would not do that.

Voices [54:21]

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

Mostly Uncle Frank [54:27]

And in fact, we are happily trimming gold out of our allocations because the allocations have gone so far out of whack that we need to do this more often. And the only bugaboo I'm having right now is tax managing this whole thing because I've sold most of the gold out of our IRAs, and so we've had to sell some of it out of the taxable and don't want to do too much of that in one calendar year. But if you want to see like the negative case for gold, go back and do some modeling between 1980 and the year 2000. And then you'll see gold dragging down the performance of any portfolio you stuck it in. Because those were just bad decades for it, particularly the 1980s or the early 1980s. And after that, it just kind of sat there and didn't do much at all. Same thing happened in the 20 teens. It kind of peaked around 2011, went down, and then just sat there and did nothing at all for a decade. But that's when you're actually supposed to be buying these things, when they're doing nothing and people are complaining about them. Because we are investing for decades and not for years. And I can guarantee you there'll come a time when gold falls twenty or thirty percent. Now it might go up another hundred percent before it does that. I don't know when that's going to happen.

Voices [55:45]

You can actually feel the energy from your ball by just putting your hands in and out. And it's through the candle that you will see the images into the crystal.

Mostly Uncle Frank [55:59]

But that's the point of not having to know. Having reasonable allocations in a portfolio and then just rebalancing them periodically to take away that bad incentive to be market timing these sorts of things.

Voices [56:14]

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

Mostly Uncle Frank [56:19]

I still think for a portfolio with a high safe withdrawal rate that the allocation to alternatives should be around 10 to 25%. And maybe it's a little higher than that, and maybe it's a little lower than that. I would not think it would be 50% or something like that, though. Now, moving on to your last question about this one-third ownership in a family vacation house, along with what kind of portfolio you might construct to support that.

Voices [56:49]

Now, wouldn't you know it? The army cuts my disability pension because it said that the plate in my head wasn't big enough.

Mostly Uncle Frank [57:04]

I think this would be a reasonable place to run a little bit of an experiment.

Voices [57:09]

You can't handle the gambling problem.

Mostly Uncle Frank [57:13]

And you need not limit yourself to something like a golden ratio portfolio or an opter portfolio. You could think of something that is in between that, say that looks more like the weird portfolio on portfolio charts that has an allocation to stocks more in the 60% range. Because you're gonna have kind of maximum flexibility on something like this, given that you could always contribute more if needed. This may be another area you might try out a little test portfolio. Maybe you'll discover something that the rest of us are not aware of.

Voices [57:50]

Oh, Mr. Marsh, don't worry. We can just transfer money from your account into a portfolio with your son and it's gone!

Mostly Uncle Frank [57:57]

You might also take a look at those portfolios suggested by the other Brian in the last episode, and there is a testfolio link there for different combinations or levered versions of a golden ratio kind of portfolio. As always, follow Bruce Lee here. Take what is useful, discard what is useless, and add something uniquely your own. Hope this all helps. Thank you for being a donor to the Father McKenna Center. 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 RiskParryRader.com, and email us frank at riskpartider.com. Or you can go to the website www.riskper.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 some stars, a follow, a review. That would be great. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Purdy Radio. Signing off.

Mostly Queen Mary [1:00:56]

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.