Welcome And Zoom Meetup Plan

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 [0:36]

Thank you, Mary, and welcome to Risk Parity Radio. If you are new here and wonder what we are talking about, you may wish to go back and listen to some of the foundational episodes for this program. And the basic foundational episodes are episodes 1, 3, 5, 7, and 9. Yes, it is still in my memory banks. 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. Ooh.

Mostly Uncle Frank [1:14]

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

Voices [1:35]

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, alright?

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 [1:52]

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 [2:03]

Top drawer. Really top drawer.

Mostly Uncle Frank [2:07]

Along with a host named after a hot dog.

Voices [2:10]

Lighten up Francis.

Mostly Uncle Frank [2:13]

But now onward, episode 513. Today's party radio. We're just gonna do what we do best here, which is attend to your emails.

Voices [2:24]

I could have told you that.

Mostly Uncle Frank [2:26]

But before we get to that, one little announcement. My good friend Optimus Bill. I am Optimus Bill has been receiving emails from many of you. Based on the last episode, he wanted to know how many people had listened to all 500 odd episodes of this podcast. And you've been telling him, and your emails have been collecting. And given the fun guy he is, he now proposes that we have a little Zoom meetup this Sunday.

Voices [2:58]

Sunday, Sunday, Sunday!

Mostly Uncle Frank [3:00]

At 4:30 or 4. I can't remember which. I think it's 4. 4 p.m.

Voices [3:06]

Down the quarter mile of death in their 7,000 horsepower nitro burning suicide machines.

Mostly Uncle Frank [3:11]

And he asks that I put a link in the show notes to it, which I will be doing.

Voices [3:16]

As they shake hands with the devil when they scream through the burning gates of hell.

Mostly Uncle Frank [3:19]

Now I can't say how entertaining this is gonna be. I mean, you're just gonna see me sitting there drinking a drink in my easy chair.

Voices [3:27]

A one bubble once got one bill.

Mostly Uncle Frank [3:35]

Well, maybe we'll do a little AMA or something. I'll ask Bill. Since this is all his idea.

Voices [3:42]

Speaking of suffocating, kids, you should never ever play in iceboxes. I'm getting a snack right now, but but don't fool around in this. Geez, someone left the icebox open. What a waste of energy. Oh wait, I'm in here, come in.

Mostly Uncle Frank [3:57]

One thing you should note though is Mary will have no part of this. She's made that clear already.

Mostly Queen Mary [4:03]

This this whole this whole thing is nonsense.

Mostly Uncle Frank [4:07]

This is Frank and Bill behaving like children again. As if we don't every day or every other day.

Voices [4:14]

Who is this gentleman sitting behind you?

Mostly Uncle Frank [4:17]

Hello, Miss Lady.

Voices [4:18]

You can't shut your shut your mouth. You shouldn't tell the person who is interviewing you to shut their mouth. You're sounding stupid now. I'm sorry, what is it? You're just coming off stupid.

Mostly Uncle Frank [4:27]

Please leave this office. Do we get any sort of souvenir?

Voices [4:30]

Get out of my office!

Mostly Uncle Frank [4:31]

So you can check that out in the show notes.

Voices [4:34]

We'll sell you the whole seat, but you'll only need the air.

Mostly Uncle Frank [4:39]

But now without further ado.

Voices [4:42]

Here I go once again with the email.

Mostly Uncle Frank [4:45]

And first off.

The All Treasuries Retirement Pitch

Mostly Uncle Frank [4:47]

First off, we have an email from Rob.

Voices [4:50]

Danger, Will Robinson. Danger.

Mostly Uncle Frank [4:53]

And Rob writes.

Mostly Queen Mary [4:55]

Hi, Frank and Mary. I just donated $250 to Fairfax Casa today. Thank you so much for being such great members of the community with all your work. I have a pretty simple devil's advocate-like question about an alternative approach to this whole thing.

Voices [5:12]

I'd sell my soul for a donut. Well, that can be arranged. Thunder! You're the devil?

Mostly Queen Mary [5:20]

It's always the one you least suspect. Given your past as a lawyer, I hope you'll appreciate it.

Voices [5:26]

We use the Socratic method here.

Mostly Queen Mary [5:29]

I have listened to and enjoyed an awful lot of your nearly 500 episodes, but hoping this topic was not previously covered. It is the question in the back of my mind as I listen to most episodes. The question is: assuming we are not terribly concerned with leaving a large legacy and are willing to forego significant growth in portfolio size, poof. And given that long-dated treasuries and most GSE bonds are now paying in excess of 5%, why not just plop our entire portfolio into a few 30-year non-callable government bonds, take advantage of the state tax exemption on this interest, and have 30 years of absolutely zero concern for being able to use a 5% withdrawal rate, what the bonds are paying, and then still have our amount of original capital effectively guaranteed at the end of this period. This would negate the need for three decades of doing any rebalancing, worrying about it, checking markets, and make the whole thing run like a Swiss watch.

Voices [6:35]

Well, let's start the insanity.

Mostly Queen Mary [6:37]

I believe that really the goal here is simplicity. And while I can appreciate that your suggested portfolios are fairly simple, they are certainly more complex than this, and subject to having to worry about varying rates of drawdown. What am I missing here with this potential guaranteed treasury bond approach? Thanks very kindly, Rob.

Voices [7:00]

At times you may feel that you have found the correct answer. I assure you that this is a total delusion on your part. You will never find the correct, absolute, and final answer.

Mostly Uncle Frank [7:14]

Well, first off, Robert, thank you for being a generous donor to Fairfax Casa. As most of you know, we do not have any sponsors on this program. We do support a couple of charities, the Father McKenna Center for me and Fairfax Casa for Mary. And if you give to the charities, one or both, you get to go to the front of the email line. And I'll put those links back in the show notes, but you can also find them at the support page at www.riskpreader.com. Just make sure you mention that you are a donor in the email so we can duly move you to the front of the line. Well, there's a couple issues with this plan, Robert. The simpler one is just basic finance and math. The more important one is more philosophical, we'll

Inflation Turns Safety Into Risk

Mostly Uncle Frank [7:56]

get to that. The basic finance and math problem you have with this plan is you're not accounting for inflation.

Voices [8:01]

That is the straight stuff, oh funk master.

Mostly Uncle Frank [8:05]

And so the real returns of a plan like this is somewhere around 2%. And the easiest way to see how bad this is is simply just to go over to test folio or portfolio charts and run this as your portfolio, 100% long-term treasury bonds, you'll see it has pretty awful characteristics if you're accounting for inflation. Obviously, if you don't account for inflation, then you wouldn't have a problem with just about any plan. But that's not living in the real world. It is interesting. I mean, this is not a new idea, obviously. People do talk about bond ladders in particular and other things like that. And if you go back to the 1980s, the rage for early retirees was about using CDs. That was the original plan in your money or your life. Vicky Robin and Joe Dominguez's book. And also another book from way back when by a guy named Paul Turhorst about how to retire at 35. But CDs were paying something like 8% at that time. People that adopted that though, it didn't work well at all, first of all, because it wasn't long enough in duration, and then when you roll them over, the interest rates kept getting lower. So everybody that used a plan like that ended up abandoning it. And you're just talking about doing the same kind of thing here.

Taxes And The Ordinary Income Trap

Mostly Uncle Frank [9:20]

The other really big problem with this is it's horribly tax inefficient. It surprised me a little bit that you go, oh, well, you don't have to pay state taxes on it. Yeah, but you have to pay federal taxes on this plan, and you're generating ordinary income, which is the worst kind of income to generate for tax purposes. You really want your returns to come in the form of capital gains, because then you can both time them and they're going to be less. You don't want all this ordinary income.

Voices [9:48]

That's not an improvement.

Mostly Uncle Frank [9:50]

And then you have the other problem is well, what do you do at the end of the 30 years? You'll have the principle there, but it'll be seriously degraded in terms of what it's worth due to the ravages of inflation over 30 years. And then you'll be this much older person that's probably going to have a lot less competence in handling money at that point. And what are they going to do when they have this pile of cash then?

Annuities As A Simpler Alternative

Mostly Uncle Frank [10:13]

Now, one thing they could do, and one thing that makes more sense than this plan would be to use annuities because simple annuities are designed for this purpose to pay out at a fixed rate, or you can actually get a cola, you know, one, two, or three percent cola, of course, you're gonna get less to begin with on a simple annuity. Now, you didn't say how old you were, but if you are in your 60s and getting to your 70s, you're gonna be able to get simple annuities that are paying out rates at 5% or more than 5% once you get into your 70s, depending on whether it's a single life or a joint life or how you structure that. But if you really wanted the simplest solution, that would be the simplest solution. It would not be fiddling around with bonds. I'm not a smart man. And that can often be a good partial solution for somebody in their 70s who knows nothing about money or is not very good with money, but has more than enough, so can use a less efficient strategy like an annuity strategy. And the other thing you'll find with annuities is that they are not taxed like this, because part of what you are getting back from there is return of principle, and that is not going to get taxed, which is also another big advantage of that strategy over what you're talking about here. It's interesting. I see a lot of people come up with plans like this or things try to get sold this way by essentially, usually what's going on is they're not taking inflation into account for either the annuity or the bond or whatever they're trying to sell you. But then on the other side, what they're usually doing is counting inflation when they're talking about stocks.

Voices [11:52]

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

Mostly Uncle Frank [11:59]

So they will come up with some ridiculous prediction that stocks are only going to yield five or six percent for the next 30 years based on some stupid cape ratio thing or vanguard prediction or some nonsense like that.

Voices [12:14]

Everyone in this room is now dumber for having listened to it.

Mostly Uncle Frank [12:18]

And so they end up not comparing apples to apples, but are comparing apples to oranges. If you're gonna use baseline assumptions for things like bonds, stocks, and other things, bonds typically have an historical return profile of about between four and six percent nominal, not taking into account inflation. Stocks are typically between 10 and 11% nominal, again, not taking into account for inflation. And things like gold or managed futures are going to be in the 7 to 8% range. Now, in order to adjust those for inflation, you'd subtract it, be like 2% or 3%. So you'd end up with after inflation adjusted returns of say 2 to 3% for bonds, 4% to 6% for the year alternatives, and around 7 to 8% for stocks. So nominally, it looks like stocks are only maybe twice as good as bonds for long-term return purposes. But inflation adjusted, they're like four times as good because you're going from two to eight instead of from five to ten. But you really have to make sure you're using the right metrics and the same kinds of metrics when you're looking across assets like this, and including inflation, obviously.

Why Simplicity Is A False Goal

Mostly Uncle Frank [13:34]

But I think the bigger problem you have here is actually philosophical.

Voices [13:38]

Occupation, stand-up philosopher. What? Stand-up philosopher. I coalesce the vapor of human experience into a viable and logical comprehension.

Mostly Uncle Frank [13:51]

When you say that you believe that the goal here is simplicity, that is not a valid or useful goal for your life. Praying to some god of simplicity for your finances is not going to enhance your life, it's not going to make your life better.

Voices [14:09]

The gods have chosen to Shibalva. Okay.

Mostly Uncle Frank [14:21]

And so it's kind of a false goal and a false god to be pursuing here. In order to use money to improve your life, go read The Soul of Wealth by Daniel Crosby, it's in there. In a chapter about how to use money to make your life better. And after solving for your basic needs, the four things are use it for relationships, use it for experiences, particularly put you in flow states, use it to pay other people to do things you don't want to do, and give the money away. Making your portfolio the simplest as possible fulfills none of those goals. None. Absolutely none.

Voices [14:59]

I've officially amounted to check you squat.

Mostly Uncle Frank [15:05]

All it does is help you with those baseline expenses. So you really need to step back and what do you really want out of life and how is money going to help you achieve those things? Because this ain't it.

Voices [15:17]

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

Mostly Uncle Frank [15:24]

Where you end up with this is what Morgan Housel calls one of the ways to be miserable spending money. And this is out of his book, The Art of Spending Money, in the chapter entitled How to Be Miserable Spending Your Money. And he gives a bunch of examples of people that end up being miserable spending their money. And I think this fixation on simplifying finances, just to make them more simple without any real goal there, falls under what he writes here, which is one of the ways to be miserable spending your money is treat all financial decisions as math decisions with no appreciation for reasonable emotion, sentimental value, and desire to feed your soul. Become more interested in making the spreadsheets happy than making yourself happy. And this attempt to achieve some magnifique simplicity falls right in that category. There's little or no value to making your portfolio as simple as possible. In terms of simplicity, you should be following Einstein here. Make things as simple as possible, but no simpler. And in this case, the only simplicity you need is simple enough for you to manage. Simple enough for you to manage.

Voices [16:35]

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

Mostly Uncle Frank [16:39]

And the truth is the portfolios we talk about here are not difficult to manage. What is going to be far more difficult to manage are things like taxes. Most people are going to have three types of accounts. They might have five types of accounts if they have a spouse. They might have two Roths, two sets of traditional IRAs, and then they may have a taxable brokerage. Managing that is way more complicated than creating a portfolio and rebalancing it once a year and selling things out of it.

Voices [17:07]

That's the fact, Jack! That's the fact, Jack!

Mostly Uncle Frank [17:11]

Because oversimplifying your finances at the expense of the rest of your life is just not a good goal.

Voices [17:17]

That and a nickel get your hot cup a jerk squat.

Mostly Uncle Frank [17:23]

What is often going on here is just fear-based planning. That I'm afraid that something is going to go wrong, and therefore I'm going to make this as simple as possible to reduce the probability that something is going to go wrong. Again, that is not the right way to deal with this problem. The right way to deal with it is that write this stuff down, have an investor policy statement that you can follow, that anybody can follow. Hire an advisor to be in the background if you're worried about becoming demented or something, or you have a spouse that's not going to be able to handle the finances. That's the way to deal with this. That was the equation. It's not to oversimplify, because the other thing that this is generally hiding is hoarding. Because yes, the simplest thing to do, the way to manage your finances, is become grossly oversaved that it doesn't really matter. That is the simplest thing to do. But you're basically trading time and life for money as opposed to trading money for life and time. So again, it's not a good goal philosophically, according to anybody that studies human well-being. But I think I've gone on too long about this or long enough about this. You might also check out episode 436, which talks about the problems that people have moving from being a saver or accumulator to a spender, and identifies these things I'm talking about in terms of how do you actually use your money to improve your well-being, as opposed to getting caught up in making a pretty spreadsheet or a simple plan for your finances that's devoid and disconnected from the rest of your life. So hopefully that helps. Thank you for being a donor to Fairfax Casa. And thank you for your email.

Voices [19:09]

My little questions spin the tumblers of your mind. You're on an operating table. My little questions are the fingers probing your brain. We do brain surgery here. You teach yourselves the law, but I train your mind. You come in here with a skull full of mush and you leave thinking like a lawyer. Second off.

ChooseFI Pushback On Small Caps

Mostly Uncle Frank [19:39]

Second off, we have an email from Matthew.

Voices [19:42]

Fortune favors the brave!

Mostly Uncle Frank [19:44]

And Matthew writes.

Mostly Queen Mary [19:46]

Hi, Frank. While listening to a recent episode of the Choose a Fi podcast, number 570, I was shocked to hear them recommend recommend against small cap funds.

Voices [19:57]

I'm shocked, shocked to find that gambling is going on in here. You're winning, sir. Oh, thank you very much. Everybody out at once.

Mostly Queen Mary [20:04]

Here's what they had to say. Brad Barrett is the host, his guest is Brian Feraldi, and they are responding to an email question regarding small caps at the 41-minute, 16-second mark. They talk about the self-cleansing nature of large cap funds and how poor companies fall out of the index, and how sort of the opposite is true for small cap funds when they're cleansing on the upside and kicking out the best performers. Could you help me and your listeners understand how and why small cap value has outperformed over long periods? I couldn't believe Brad and Brian were disparaging small caps like this, and now I'm hesitant to listen to any more of that podcast if they are going to be spewing misinformation like that. Matthew.

Voices [21:03]

Now, when men get to fighting, it happens here. And it finishes here. Two men enter, one man leaves.

Mostly Uncle Frank [21:14]

Well now, here's an interesting email.

Voices [21:19]

Um, is the poop deck really what I think it is? I like the cut of your gib. What's a gib? Ha ha! Promote that man.

Mostly Uncle Frank [21:30]

So Matthew's referring to a choose FI podcast number 570. That's from last fall. This email is actually from December. Just to put it in context there. And I did not have Mary read the transcript you also provided, but if anybody wants to go listen to it, it's basically at minutes 41 in that podcast.

Voices [21:54]

Mary, Mary, I need your hugged.

Mostly Uncle Frank [22:02]

But let's first talk about 2 Zi itself, because I am very biased in favor of 2 ZI, but I have very good reasons for being biased in favor of 2 ZI.

Voices [22:14]

Ooh, how convenient!

Mostly Uncle Frank [22:16]

First off, Brad's a good friend of mine. He's also known as the nicest guy of Fi. I can't remember who christened him that, but on his birthday, every year, I post a little button that says the nicest guy of Fi and has his picture in it for his birthday, which I know probably annoys him at some level, but he plays along, and I appreciate that. But I've known Brad and Jonathan since they started that podcast back in 2017. And it really was a breath of fresh air at the time, and it still is. Because prior to that, a lot of us who were interested in financial independence topics had basically given up trying to convince other people that it was something they ought to be doing.

Voices [23:00]

Do you think I got where I am today because I dress like Peter Pan here?

Mostly Uncle Frank [23:05]

Because, you know, we were those kind of weird people with our spreadsheets and stuff like that. And so our general approach was the fi club approach.

Voices [23:13]

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

Mostly Uncle Frank [23:25]

What Brad and Jonathan really did is bring a lot of this stuff into the mainstream and make it palatable to a lot more people. Including a lot more women, by the way. Because this has always been a male-dominated thing when you start talking about the spreadsheets and the numbers and things like that.

Voices [23:44]

We're streaking! Frank! Hey, honey! Hey! We're streaking! Frank, get in the car. Everybody's doing it now.

Mostly Uncle Frank [23:55]

And so that program by itself has just been one of the biggest factors in popularizing and showing people how they can become financially independent. And it's been to the benefit of thousands of people. The other thing that it's spawned is a lot of groups, choose FI local groups, and I belong to several in the DC area, that are a lot of fun to go to. So you get to meet like-minded people. And what you find at these groups are people that are trying to be better. They're trying to be better in their life in some way, finances and otherwise. And so it's a very refreshing group of people to be around because as we know, a lot of the people that were around day-to-day often are just complaining about everything. The people who are choosing fire generally not in the complainer whiner bucket or basket, but are actually trying to be better and trying to learn things and try to apply these principles. And the other thing I really appreciate about Brad and Jonathan and their podcast is that he doesn't take ads. And that's not a big deal for a lot of people. It's a big deal to me because I think that is what ultimately keeps something as independent and also not turning all this into some kind of side hustle where you're selling courses or promoting calculators or other things like that.

Voices [25:17]

I got this inkling. I just want to run it past you. Here's how it would work. You get a bunch of people around the world who are doing highly skilled work, but they're willing to do it for free and volunteer their time, 20, sometimes 30 hours a week. Oh, but I'm but I'm not done. And then what they create, they give it away rather than sell it. It's going to be huge.

Mostly Uncle Frank [25:45]

I don't mind a little bit of that, but when you listen to a lot of the podcasts, there's just way too much of that. And then the ones that are done by people who are financial advisors or associated by with financial advisors are always very skewed based on the way they run their practices.

Voices [26:00]

A B C A always B B C closing. Always B closing. Always be closing.

Mostly Uncle Frank [26:11]

But I believe this information is just information. It should be freely shared and disseminated and not hidden behind paywalls or clubs you need to join or other things like that. This was not written for chiefs.

Voices [26:28]

Hear me. Hear this. We the people. That which you call Eid Plebnista was not written for the chiefs of the kings or the warriors

Investing Levels And Shiny Objects

Voices [26:40]

or the rich or the powerful, but for all the people.

Mostly Uncle Frank [26:42]

And so I greatly appreciated that Brad has kept that podcast in that vein. Okay, now let's go apply one of our favorite principles to the Choose a Fi podcast, which is the Bruce Lee principle. Whenever you're listening to something, take what is useful, discard what is useless, and add something that is uniquely your own. So to put that podcast in its proper context, that is trying to get people essentially from level one to level three in investing. Just to briefly describe these levels, because I think this is a useful classification system for talking about a lot of investing related material. Level one is people that have never invested before, they may have budget or debt problems, they need to sort of figure out how to make more money than they're spending and then begin to invest. Level two are people that have reached that, so they have money to invest, but their concept of investing generally comes from financial media and promotional materials.

Voices [27:39]

Bing again.

Mostly Uncle Frank [27:41]

And so they tend to believe that investing is complicated, and what they really need to do is find gurus and people with magic investing buttons that they can push or shiny objects that they can buy that are going to fulfill their investing needs. Do you have life insurance? Because if you do, you can always use a little more.

Voices [28:02]

Am I right or am I right or am I right?

Mostly Uncle Frank [28:06]

And so they run around looking for opinions all the time and keep changing their minds based on whatever opinion comes up next in search of these shiny objects and magic investing buttons.

Voices [28:17]

You know, whenever I see an opportunity now, I charge it like a bull. Ned the bull, that's me now.

Mostly Uncle Frank [28:23]

Level three are people that have recognized there are no shiny objects or magic investing buttons. All you really need to do is try to minimize your costs, and there are plenty of good ways of doing that. And that ends up being what people like the Bogleheads do, which is invest in some index funds, do it consistently, and you'll be fine. And you don't need any magic investing buttons, and you don't need any shiny objects. So what Choose FI is trying to do is get people from level one to level three. They're really not talking about things like we talk about here, which are mostly level three and level four. And level four deals in particular with understanding actually the investing principles and why this stuff works, and then being able to apply those independently of any kind of formula that you might be following as a level three kind of person. So you shouldn't expect a whole lot of level four kinds of conversations at Choose FI. That's not who it's for, that's not how it's structured. It is for getting people, particularly in their 20s, 30s, and 40s, out of level one, past level two, so they're not wasting their money on financial media or financial advisor nonsense.

Voices [29:36]

I drink your milkshake. I drink it up every day. I drink it up, I drink it up.

Mostly Uncle Frank [29:49]

And to level three, where they can actually accumulate and become financially independent. Did you see the memo about that? And so necessarily, a lot of the stuff ends up being a bit dumbed down to help people understand who have never encountered this stuff before. That is the way a book like The Simple Path to Wealth is written. It's written for somebody in their 20s who doesn't know anything about investing. And so it fixates on getting this one total market fund and getting to level three that way, ignoring shiny objects and magic investing buttons along the way. The problem with that, and Brad has encountered this, is that VTSAX has become a shiny object in the minds of inexperienced people. And so a lot of people that get the material or look at the material erroneously think that this one fund, VTSAX, a Vanguard Total Market Fund, is the magic button or shiny object that they need to seek. And that is going to answer all of their queries, problems, or whatever, without understanding even what it is, why it works, or anything about it. And what this has led, and Brad feels bad about this, is you end up with people going to places like Fidelity and Schwab and buying this Vanguard Mutual Fund, VTSAX, and paying enormous transaction fees. And I know he laments this happening, but it does happen. The reason it happens is because people instead of moving from level one to three are getting stuck in level two and using VTSAX as this shiny object that they think they need to buy, instead of just any old SP 500 or total market fund, which is really what the principle is you're talking about there. And he has tried to steer people to VTI at least because it's the ETF version, and people should be using ETFs these days after 2020, the when the transaction fees went away. But if you listen to the older podcasts, people do interpret it as VTSAX is this magic shiny object, and I need to go buy that, and that's the single and only way to do this. So, with that in mind, and I look at this transcript you sent me, and I think I do recall listening to this at the time, I mean, this conversation just kind of muddled is really the problem with it. I mean, Brian Farale is a person that invests in individual stocks and talks about how to analyze them and things like that. So this was kind of a side conversation, but it does get you to the problem that you have with oversimplification of these issues. And one of those things is this concept of VTSAX's self-cleansing.

Voices [32:31]

What does that mean? Never question Bruce Dickens.

Mostly Uncle Frank [32:36]

Okay, if you think that that is a magic property of only this fund, that is a misunderstanding. That's part of this viewing it as a shiny object or magic button.

Voices [32:47]

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

Index Funds And The Momentum Factor

Voices [32:51]

works.

Mostly Uncle Frank [32:51]

Because the truth is, all index funds are self-cleansing. That's how they work. They're algorithmic funds. They have an algorithm that tells them what to buy and in what proportions to buy it. And that's true of VTSAX, the S P 500, a small cap value fund. Every fund has basically a list of these are the things we're going to buy in these proportions based on our algorithm. We're going to run this algorithm periodically and it's going to tell us how to change this. All index funds are self-cleansing. And so saying something is self-cleansing is kind of a meaningless throwaway thing that I wish people would stop using once they understand a little bit about investing. That's appropriate when you're explaining it to somebody for the first time. If somebody's been around for years, they should not be using things like self-cleansing because this is not an appliance in your kitchen. They should be able to explain how index funds work as a general principle and as an algorithm that is being run. Because what really distinguishes those kind of funds from managed funds is you don't have human beings that are sitting there picking the stocks. Instead, you have this algorithm that picks them for you. And that's true of a total market weighted fund, it's true of a small cap value fund, it's true of any kind of index funds. It's true of the algorithmic funds provided by Avantis or DFA.

Voices [34:13]

I'm telling you, fellas, you're gonna want that cowbell.

Mostly Uncle Frank [34:17]

And what also gets confused here is they're saying self-cleansing when what they really mean is there is a momentum component to cap-weighted funds. What I mean by that is as a stock becomes more popular, as the company grows in size, as people buy more of it, the fund automatically buys more of it. That is using a momentum factor, is what it's really doing. It has nothing to do with self-cleansing.

Voices [34:46]

Forget about it.

Mostly Uncle Frank [34:48]

A cap-weighted fund like that automatically has a momentum factor built into it. Now it's a very slow momentum factor. If you want the real momentum factor, actually get a fund that specializes in that, like SPMO. There's a Vanguard version of that. I think it's called VFMO. But this did cause me to go back and look at some of those momentum funds. And our friend Alexi the Dude is very fond of momentum funds. We've talked about them here before.

Voices [35:15]

So that's what you call me, you know, uh that or uh his dudeness or uh duder or uh you know Bruce Dickinson, if you're not into the whole brevity thing.

Mostly Uncle Frank [35:27]

I've in the past not been that convinced that they're necessarily what you want. The problem being is that there are several different ways of measuring and implementing momentum, some being with just large caps like SPMO, some being with large and mid-caps like VFMO, and there are other variations of that. It is interesting. I did recently see that Testfolio has put a simulated version of SPMO that goes all the way back to 1972. And looking at that, that is a very nice fund to pair with small cap value.

Voices [36:02]

I'll be honest, fellas, I could have used a little more cowbell.

Mostly Uncle Frank [36:06]

Because they're even further on different ends of the spectrum, they're even better diversified, and a momentum fund really performs well when things are going well in the stock market. Now, it can also crash 60, 70, 80 percent, which is why you don't want to put all your eggs in that basket.

Voices [36:24]

You need somebody watching your back at all times.

Mostly Uncle Frank [36:28]

But I can see in the future using a momentum fund like we do on the international side with IDMO, but we also might be using SPMO as our large cap growth fund or something like that. I just discovered this this past week, so I haven't thought it through all the way, but I see this as a new and interesting development. Prior to this, all these momentum funds just weren't that old. And so I was wondering, well, how did they perform in the 1970s and things like that? But anyway, getting back to this topic. So they confused what they should have been talking about is it has a momentum factor built into it with this concept of self-cleansing, which applies to all funds. So what they really should have been saying is that a small cap value fund does not have a momentum factor built into it like a cap-weighted large cap fund does. And the answer to that is kind of, well, so what? The reason you're getting it is for diversification because the momentum factor has pluses and minuses to it. So you are correct that it was a muddled conversation and did not come to a conclusion that is well justified if you understand what these funds are and how they actually work, because they did not mention the word momentum in any of the conversation, but instead got stuck on this self-cleansing idea that it's really not a phrase or term sophisticated investors should be using. So applying Bruce Lee's adage, this is the part that you should discard because it's not useful. That doesn't mean, though, that the Choose If I podcast is not worth listening to overall and doesn't have a lot of very useful things to say for lots of people. And so I plan to continue listening to it and appearing on it when invited. The last one I did was with Ginger Gray, a book club about the five regrets of the dying. Maybe I'll link to that in the show notes. But no, I do not think you should be relying on choose FI for higher level concepts. You're gonna need to go to podcasts like excess returns and rational reminder and things that are using the language of financial professionals such as momentum, and not using the language of simplified explanations such as self-cleansing. Now, as to your question as to why do small cap value stocks outperform, there have been reams and reams of material written on that, that it gets pretty academic. Basically, you're being compensated for risk, is

Small Cap Value For Diversification

Mostly Uncle Frank [39:00]

the general tenor of that. For our purposes, though, it is really sufficient to know that over the past hundred years, small cap and small cap value has outperformed, but it doesn't outperform all the time. And if you look at, say, the past 10 or 15 years, it is underperformed. So there's no way to predict when it's going to outperform or not. Honestly, we really don't care here whether small cap value is going to outperform the rest of the market. Because the reason we're holding it is for diversification, because it's different from the rest of the market. And in particular, if you line up small cap value stocks with large cap growth stocks, you get a nice diversification there, and you get effectively some insurance for times when you do end up with these growth market crashes like in the 1970s or the early 2000s or in 2022. That's why we're holding it. It's suffice for us to know that it's going to perform just as well or better than the rest of the market, and that's really all we need to know. If you look at the four quadrants of investments here, if you look at large cap value, large cap growth, small cap value, and small cap growth, what you'll see there is that large cap growth and small cap value tend to do the best. Large cap value is less volatile, but it also generally underperforms. And small cap growth is very volatile and seems to also underperform over time. But by pairing up large cap growth or large cap blend that has a lot of growth in it and a small cap value, you kind of get the best of both worlds in as simple a package as possible. I was excited. So hopefully that helps. Give Brad Barrett a break, will ya? I mean, he's the nicest guy of fi. Come on. And thank you for your email.

Voices [41:01]

What is that man in pink? Oh, that's Homer Simpson, sir. He's one of your boobs from Sector 7G. One of your cabbage heads from Sector 7G. Sorry, one of your drones from Sector 7G. And one of your steps in Sector 7G. Sector C and Group I mean Sector 7G. One of the carbon blobs from Sector 7G. One of your organ banks from Sector 7G. Or one of your chairmoisteners from Sector 7G. Doesn't ring a bell. Last off.

Mostly Uncle Frank [41:26]

Last off of an email from Luke.

Voices [41:29]

Use the false look.

Mostly Uncle Frank [41:35]

Let go. And Luke writes.

Tracking Portfolios Through Drawdown

Mostly Queen Mary [41:39]

Frank. Shushi's question at the end of episode 461 caught my attention as I've had the same quandary on how to track the expected post-withdrawal inflation-adjusted portfolio value through the drawdown stage. I don't feel like you fully answered their question unless I'm misunderstanding your answer. You seem to focus on the element of current valuations and how to reduce withdrawals rather than identifying when to do so. Similar to Shushi, I too have thought about needing a portfolio balance forecast to compare against the actual values in drawdown as an early warning for a failure level trend. Using the portfolio charts drawdown calculator you referenced, how would you account for portfolio reductions from annual withdrawals in addition to market performance? If you're purely using historic drawdown as the metric for when to cut spending, does that assume that the portfolio chart's calculated safe withdrawal rate keeps the portfolio's inflation and adjusted value constant? For example, let's say I retire early and start drawing down in my 40s at the calculated 5-6% rate for my risk parity portfolio. How would I know in my 50s and 60s if that is still sustainable after 15 plus years of withdrawal and inflation effects? Since the precedence of a drawdown's duration is unknown until the end, it seems easier to work from a portfolio purchasing power expectation rather than anything tied to drawdowns. If I'm comfortable dying with zero, do I then need to overspend my safe withdrawal rate in order to reduce the purchasing power of a risk parity portfolio? Hopefully, I'm articulating this to properly clarify a finer point rather than missing the main point of your previous answer. Thanks for everything you're doing, Luke.

Voices [43:26]

Do the chickens have large talons? Do they have what? Large talons. I don't understand a word you just said.

When To Rerun The Retirement Plan

Mostly Uncle Frank [43:35]

Well, this email is also from last December. It's referring to episode 461. I won't rehash everything I talked about there, but basically it was about portfolio management when you're in retirement and you've come up with a plan and you're implementing the plan. And then the broad question was when would you make adjustments? And I think you're making this too complicated.

Voices [43:56]

What do you intend to do, sir? Delta's already on probation. Yeah? Yes, sir. Oh. Then as of this moment, they're on double secret probation. Double secret probation, sir?

Mostly Uncle Frank [44:11]

Because first, it's highly unlikely to occur that you're going to have this problem. Basically, it can only happen if you have a really bad outcome in like the first year or first couple of years. 80% of the time when you're holding a portfolio, like one of these risk parity style portfolios, it's going to be going up. So most of the time you're going to retire and your portfolio is going to go up in value. So then even if it goes down in value by 20% or something in a year subsequent to that, it's not going to go 20% underwater from your starting value. And I'm using 20% because that's oftentimes a place where somebody would implement a guardrail or something like that. And this actually happened to us. You know, we were retired in 2020. Our portfolio went up in value at the rest of 2020 and 2021. And then we had 2022 and it went down in value considerably. That was in fact one of the worst years in the past 50 or 60 by itself, mostly because it occurred exactly in one calendar year. If it had gone June to June, it would have looked different on the stats there. But even though things went down by about 20% in that year, we didn't do anything. We just kept spending the money that we had planned to do. So there wasn't a real issue there. And in almost all circumstances, there isn't going to be a real issue for you either, particularly if you're talking about 15 plus years of withdrawals down the road. These portfolios have never been underwater for more than like three or four years. So the chances of you having a problem 15 plus years down the road are almost negligible.

Voices [45:41]

Forget about it.

Mostly Uncle Frank [45:42]

It's not even worth planning for, is what I'm saying. But how do people actually do this in real life? And how do financial advisors, at least good ones, do this? They just rerun the plan. Usually they rerun the plan every year with their Bunny Carlos simulator, whatever they use to construct the plan in the first place, they rerun it using current projected expenses as opposed to what you'd projected 10 or 15 years ago because that's going to change as well. And you don't really care whether your plan now actually fulfilled some forecast that you made 10 or 15 years ago. That really doesn't matter. You don't get a prize. You don't get a grade on whether you made this forecast 10 years ago and it turned out to be true, or part of it was true and part of it wasn't. There's there's no exam going on here. Shirley, you can't be serious. I am serious.

Voices [46:34]

And don't call me Shirley.

Mostly Uncle Frank [46:36]

All that's going to be relevant at that time is where you are, what your expenses are, what your portfolio looks like, and then what do things look like going forward. And you can rerun your plan as many times as you want. But that does reveal a key difference between the kinds of portfolios we talk about here and your average two or three fund kind of portfolios. Because if you're holding one of those average two or three fun kind of portfolios, you should expect to have a bad decade where your portfolio is underwater for an entire decade and that you're going to be experiencing drawdowns of 30 or 40 percent.

Voices [47:16]

Target should be ahead. You will have to be side. You will have to decide. You will have to decide.

Mostly Uncle Frank [47:35]

Your expectation is not that. Your expectation is going to be you're going to be underwater for probably a max of four years, maybe five, more likely one or two, and that your drawdowns aren't going to be 30 or 40%, they're going to be more like 20%. And if you're within those parameters, I don't see any reason why you need to change your spending, your plan, or anything else. That's the whole point of putting together a portfolio like this in the first place. That it's not going to require you to be doing all these machinations later on.

Voices [48:07]

Okay, okay, okay. Everybody, everybody, chill.

Mostly Uncle Frank [48:11]

But you can and probably should reassess your portfolio situation periodically. Because really the chances are you're going to have more money than you thought you were going to have, in which case you might consider increasing spending. And that is the more likely outcome than thinking you need to decrease spending. But you can do that simply by rerunning your plan at that time. I think the problem here may mostly be psychological, that for some reason people think that when they come up with their retirement plan, it is etched in stone, and you have to follow exactly what it is, otherwise you're going to fall off the rail or something bad is going to happen. And that's just not true.

Voices [48:53]

And what could be better than serving up smiles? Being dead. We do that for 40 years and then we die.

Mostly Uncle Frank [49:12]

And you didn't know what was going to happen when you were five and what you would be doing 20 years later. And you were fine.

Voices [49:20]

Joey, did you ever hang around a gymnasium?

Mostly Uncle Frank [49:25]

So to think that just because you don't know exactly what things are going to be like 20 years from now, that that is somehow some kind of insurmountable problem that you need to be doing something about, that's just not an accurate way to view the world, honestly.

Voices [49:39]

Of course, I don't have my tapioca pudding. We have tapioca pudding for dessert. Yeah, well, we can do that. We can work tapioca pudding. I'm gonna call Lenny. Of course, of course it's definitely not my room, and I don't have my tapioca pudding and the bed's in the wrong place. That's not definitely not my bed. If you like it there, you can move it. Why do you want the bedroom? It should be near the window. Of course, I I I don't have my books in the course there's no bookshelves. I I'm definitely books. I'm I'm gonna I'm gonna be bookless.

Mostly Uncle Frank [50:03]

So you're gonna be fine, and the chances of you having to make some kind of large adjustment are gonna be small. If anything, it's going to be spending more money, not less money. And so hopefully that's helpful, at least a little bit helpful. I did think I already answered this question back at 461. But you beg to differ, and you are free to do that. And email me again for clarification what you have done.

Voices [50:30]

Joey, have you ever been in a in a Turkish prison?

Mostly Uncle Frank [50:35]

So again, hopefully that helps, and thank you for your email.

Voices [50:39]

Of course, I'm an excellent driver. You know how to drive? Yeah. Of course, I don't have my underwear.

Emails Reviews And Sign-Off

Mostly Uncle Frank [50:45]

What? But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to Frank at RiskPartyRadio.com. Email us frank at riskparty radio.com. Or you can go to the website www.riskpartyradio.com. Put your message into the contact form and I'll get it all that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, and be 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 [51:25]

Well, my baby's gone to the gold night. I need to take my baby to the night of the lane. I wanna take the drop down off of the bottom. Let's go. What do you want? One bubble one touch one bill.

Mostly Queen Mary [52:41]

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.