Opening Quotes And Show Setup

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, 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.riskparody radio.com. Inconceivable. All thanks to our friend Luke, our volunteer in Quebec. Sacosh. 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 move, 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 [1:52]

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 [2:05]

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 [2:14]

But now onward, episode 517. Which is attend to your emails.

Voices [2:24]

I could have told you that.

Mostly Uncle Frank [2:26]

And these ones have been sitting around here since December.

Voices [2:31]

That's not an improvement.

Mostly Uncle Frank [2:32]

So I guess it's time we got to them.

Voices [2:35]

Yeah. Didn't you get that memo?

Mostly Uncle Frank [2:38]

And so without further ado.

Voices [2:40]

Here I go once again with the email.

Mostly Uncle Frank [2:43]

And first off.

FIRE Listener Wants Safer Allocation

Mostly Uncle Frank [2:46]

First off, I have an email from Nick.

Voices [2:49]

Hey look, mister, we save hard drinks in here for men who want to get drunk fast, and we don't need any characters around to get the joint atmosphere. Is that clear? I don't have to slip you my lip for a convincing.

Mostly Uncle Frank [3:03]

And Nick writes.

Mostly Queen Mary [3:05]

Hello. Love your work. Here's a question for you. I have been on the fire path and have amassed a decent sized portfolio at age 35. 1.5 million.

Voices [3:16]

Fire, fire, fire, fire.

Mostly Queen Mary [3:20]

In theory, this is enough to cover my expenses at a 3.5% withdrawal rate. I have been in 100% equities up until this point, but I'm currently battling the one more year syndrome. I'm confused about how to set up my asset allocation now. I've heard the phrase, once you win the game, leave the casino.

Voices [3:40]

This is the grandson of the 17th richest man in California. Does he drink? What he wants is money, because he doesn't know when to say that's it. I'm two million ahead. I have a car and a house and a family, and it's all paid for. I mean, even I did that.

Mostly Queen Mary [3:56]

Most of the advice around this is geared toward those moving to a traditional retirement age. In my situation, would you stick to a higher equity portfolio? Or should I switch to more conservative assets? A fear of mine would be that the market tanks for 10 years and I'm stuck working until 45. Thank you.

Voices [4:21]

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

Mostly Uncle Frank [4:28]

Well, Nick, I'm glad you're enjoying this program.

Voices [4:32]

Young America, yes sir.

Mostly Uncle Frank [4:34]

And I will answer your question now, even though it's been almost six months. So, if you are 35, you have one and a half million dollars.

Voices [4:44]

One hundred billion dollars.

Mostly Uncle Frank [4:47]

And you are only withdrawing at a 3.5% withdrawal rate, that is a very low withdrawal rate on any timeline.

Voices [4:56]

That is the straight stuff, oh funkmaster.

Mostly Uncle Frank [4:59]

But you are correct that your portfolio does not seem to match what your intentions are. Now, before I get into this too far, I think you should go back and listen to episode 514 because this is Rebecca's email, and particularly the middle part of that talks about transitioning. There are a lot of links there to show you how to build one of these kind of portfolios, including Paula Pant's blueprint there. And she is also in her 30s, so is in a very similar position to you, except they have children and stuff. And you seem to have a lot more flexibility given what you said.

Voices [5:44]

I don't care about the children.

Mostly Uncle Frank [5:46]

But everything I said to her also applies to you. So getting specifically to you, with a 3.5% withdrawal rate, you have a lot of leeway as to what kind of portfolio you could hold. You could hold a portfolio that has as little as 30% in stocks in it. You could hold your 100% stock portfolio. So the real question you have is what are your preferences and how do you make your portfolio actually match your preferences? Because what a 100% stock portfolio and a low withdrawal rate implies is that your primary goal and preference is to die with the most money possible. That is what economists call a revealed preference. What are the most natural consequences of your behavior, regardless of what you say your preferences are? If you are holding a high amount of stocks and just not spending much money, your revealed preference is to die with the most money possible.

Voices [6:52]

That's the fact, Jack!

Mostly Uncle Frank [6:54]

Now, according to what you said in your second paragraph, that doesn't seem to be actually your goal. So if that's not your goal, then you need a different portfolio. So let's look at what you said here. You said a fear of yours would be that the market tanks for 10 years and you're stuck working until age 45. That implies a goal of sleep well at night and not have the most money possible. Now we just answered a question like this in episode 508, the first one, Michael, who was somebody with 100% equity portfolio and they wanted to sleep better at night. And we went over some of the kinds of portfolios, which happen to be risk parity style portfolios, that reduce your drawdowns, both the length of your drawdowns and the depth of your drawdowns. Because right now your portfolio says you don't care about that. You are willing to undergo a 50% drawdown that could last for more than a decade. That is what your preference shows by holding that 100% stock portfolio that you don't really care about your drawdowns. But if you're saying that you actually do care, then you need to do something different. You can't expect to have one preference and behave like you're operating under a different preference. So if you adopt a risk parity style portfolio, you're likely to have drawdowns of 20% or less that only go on for three to four years. And you ask what I would do in your situation. What I would do in your situation is get really clear about what your actual preference and goals are. That is the biggest problem that I see people in personal finance have. They say they want one thing and they behave like they want another thing. And usually it's based on fear and greed. They want to be greedy and keep up with the Joneses in their 100% stock portfolio and have the highest returns every year. They say they don't want that, but they actually do. That is what you need to wrestle with. Are you comfortable with not keeping up with your peers as far as your investments are concerned? Because they're going to keep working, they're going to be in 100% stock portfolios, they're going to have the return to the SP 500 every year. You're not going to have those in a more conservative portfolio. You will tend to win when they have bad years, but they're only going to have bad years. Your peers are only going to have bad years about three in 10. So about 70% of the time, your risk parity style portfolio is likely to underperform the 100% stock portfolio. But in the 30% of the time, when that 100% stock portfolio is doing really horribly, you're likely to do a lot better. That is the trade-off. And you need to be comfortable with that emotionally. Because if you're trying to keep up with the Joneses, this isn't going to work, regardless of what kind of portfolio you're picking or taking. All

The First Decade Matters Most

Mostly Uncle Frank [10:09]

right, now we need to address what appears to be your false assumption and belief. And this is very common in the fire community where people say, Well, my retirement's going to be a lot longer. Therefore, it's completely different. It's completely different than somebody who's at a traditional retirement age. It's just so different. I have to do everything different.

Voices [10:31]

Lighten up, Francis.

Mostly Uncle Frank [10:34]

That's wrong. That's a lie. And people who believe that have not looked at the data. They have not analyzed this. What they are typically doing is either making excuses for hoarding or making excuses to keep chasing the Joneses and getting those high returns with their 100% equity portfolio. Because in their hardest of hearts, they want to beat the market still. Or at least beat their friends. The truth is, and this is true at any age, I don't care if you're 35 or 65 or 75 or 15. It's the first 10 years of whatever retirement you have that really make all the difference. If you can survive that, you're typically going to be fine. Because in almost all cases, if you have a reasonable withdrawal rate, you're going to have more money than you need at the end of that 10 years. It's only in those bad decade scenarios, and that's where these 4% rules come from. That's assuming you have a bad decade right after retirement. That is what your 3.5% withdrawal rate is actually assuming. You need to have a bad decade for that to be the right number. Because if you don't have a bad decade, then you could have spent more money. So it's going to be that first decade that really matters here, not having a longer retirement. The way you solve for a longer retirement is actually on the other end of the risk spectrum. It's on the cash end or the short-term bond end. Because the real danger you face over that long of a retirement is inflation. And the real risk is holding too much in cash or too much in short-term bonds. And too much is more than 10%. Let's just define it right there. Always money in a banana stand. Once you go over 10% in really short-term bonds or cash, you will have a reduced withdrawal rate because of the cash drag you're creating. If you're not creating that cash drag, you're not going to have that problem. There's $250,000 lining the walls of the banana stand. And specifically, you need to have significant investments in things that keep up with inflation, including stocks, especially value-tilted stocks. Not all growth stocks, value-tilted stocks as well. Alternative assets like gold and managed futures also do fine in inflation. If you have things like REITs or real estate, that will be fine in inflation. Anything that tends to grow over time at a reasonable rate is going to be fine. This is why you do not want to have too many bonds in your portfolio, because what you really want to have your bonds be doing is just being recession insurance. They're around in case you face a 2008 or a 2001 or a 2020. But you don't expect any bonds to keep up with inflation either. So just don't have too many of them. If you want to know what is too many for good safe withdrawal rates, go listen to that episode with Rebecca that I just talked about. Read Paula Pants Blueprint and the other materials that are there, and that will give you kind of the ranges for assets to create a portfolio that is robust and has a higher safe withdrawal rate and has shallower and shorter drawdowns. So as long as you are not hoarding big piles of cash and things like CDs or buckets, ladders, and flower pots full of cash, banana stands full of cash.

Voices [14:27]

And so Michael, his son, and his brother together enjoyed the cathartic burning of the banana stand.

Mostly Uncle Frank [14:33]

There was money in that banana stand. Well, it's all gone now, Dad. You're not going to have a problem here. In fact, you're going to end up with too much money. And you're going to need to start spending more money at some point. Because the portfolios we talk about here are designed for 5% withdrawal rates on a four ever time frame. Especially when you account for the personal inflation you are likely to experience, which is going to be less than the CPI, particularly as you get older. And also the fact that you have flexibility and are not locked into spending more every year. So you should not be worried that you need to do something weird, special, or different because your retirement's going to be longer. What you should be focused on is what your real actual preferences are, honestly, with yourself, and pick a portfolio that matches those preferences. If I were you, I would pick a risk parity style portfolio and spend more money. Have more fun now. Because you can.

A Blog Post Takes Shots

Mostly Uncle Frank [16:26]

Second off, we have an email from Patrick.

Voices [16:29]

What kind of place is this?

Mostly Uncle Frank [16:33]

And Patrick writes.

Mostly Queen Mary [16:35]

Hey Frank, Patrick again. Thank you for answering my previous question about managing individual REITs. Your explanation of the difference between individual stocks versus an index made perfect sense. Now, I've got to know what your take is on Big Arn's new post, How to Lie with Personal Finances. He uses some pretty condescending language about risk parity investing and continues his attack on small cap value. He admits that gold might be useful, but then uses a crystal ball on its current valuation. He never addresses any backtesting results from alternative calculators.

Voices [17:27]

They're covered with free cheese. All I know is Mr. Krabs said, Patrick, don't do that! Cheesy.

Mostly Uncle Frank [17:38]

Well, Patrick, no, I hadn't looked at that until you sent me this email. I just read it for this podcast. The short answer is no, there's there's nothing to see there. And most of it is relatively common knowledge amongst knowledgeable investors. But I will indulge you and we can go over it. There are six points there. So I did laugh when I pulled this up. It's got the clickbaity title, How to Lie with Personal Finance, Part 3, Diversification, but then it's got this picture of these little Pinocchio dolls on the first page of it. Which I thought was a nice touch. But let's just go over these.

Six Diversification Myths Reviewed

Mostly Uncle Frank [18:49]

So the first lie he's pointed out here is more stocks equals more diversification. And he is specifically talking about people who compare funds and say, well, this one's got 3,000 stocks in it, and this one's only got 300. The one with 3,000 stocks in it must be more diversified and more better. And he's correct that that's not a useful metric to be using counting up the number of stocks in a particular fund. And actually, it's kind of a red flag if you run into people who are investing based on that way, saying that the total stock market is much better than the S P 500 because it's got thousands more things in it.

Voices [19:28]

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

Mostly Uncle Frank [19:32]

They're not really thinking about this correctly. First, once you get over about 50 things in a fund, assuming you're equally allocated to them or something like that, you're not adding a whole lot more diversification by just adding more things that are similar to the things you already have. The second thing is these kinds of funds he's talking about, which are large cap weighted, are actually very concentrated now in their top holdings. That the top 10 holdings in the SP 500 are total market fund are comprising about 40% of the fund. So that cap weighting actually makes them less diversified overall. There's more concentration in the top holdings. But that's just how one of these funds works. And that does cause people to make silly statements like, well, you know that the total stock market fund does have exposure to small caps. It's like saying that two drops of cream in your coffee is cream in the coffee. It's not significant enough to be meaningful that if you really want to diversify a portfolio and you're using a large cap weighted fund as one of your funds, you need to pick some other fund that's not doing that. Like a small cap value fund. Basically anything else that is not large cap weighted because you're just covering the same things with the same concentrations, and that's not how you get diversification. So I agree with him. But I think what's really going on here most of the time is people are fixated on their one, two, or three fund portfolios and trying to justify that, and they end up treating things like VTSAX as like some kind of magic button or shiny object. Free cheese because they're overfixated on simplicity and worshiping this simplicity god. And none of that is good investing, it's just a lack of understanding about how these funds actually work.

Voices [21:29]

Hello! Hello, anybody home? Huh? Think McFly, think.

Mostly Uncle Frank [21:34]

Now his second lie is more ETFs equals more diversification, that's the lie. And yeah, I agree with that on its face, because just having more ETFs doesn't tell you whether they're correlated or not, or holding the same kinds of things or not. But then he goes on here to try to take swipes at Bill Bangin and Bill Bangin's book, which showed that by holding a variety of different kinds of asset classes, not Just funds. You do get more diversification. And this is where he kind of goes off the rails because he starts talking about what's going on in the last 10 years. That's not a useful measure of anything for long-term investors.

Voices [22:14]

Forget about it.

Mostly Uncle Frank [22:15]

Any 10-year period is probably going to be idiosyncratic, so you'd have to use at least 25 years to start talking about something. So I don't agree with his swipes at Bill Bangin. Or this fixation about what happened in the past 10 years.

Voices [22:29]

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

Mostly Uncle Frank [22:36]

The best way to actually measure diversification is to look at correlations between two assets. Which you can do at test folio or many other places. Which leads to the third lie, which he says it's a lie that low correlation equals better diversification.

Voices [22:52]

Surely you can't be serious. I am serious. And don't call me Shirley.

Mostly Uncle Frank [22:57]

And I think he's probably mostly wrong here. And he puts up some analysis that is not a very good analysis. It's like a design to make the conclusion kind of analysis, which is unfortunately common at this site. You gotta be careful with these things. But he starts talking about ETFs with correlations of 0.7, 0.8, and 0.9. Those really aren't diversified assets, those are all highly positively correlated. If you were going to do a comparison like that, you'd want to compare something that was say negatively correlated, something that was zero correlated, and then something that had like less than 0.5 in terms of a correlation. I don't think his analysis is meaningful. Because in fact, one of the best ways to determine or measure diversification is to look at correlation numbers and to look at correlations in particular macroeconomic environments, because that also changes.

Why Correlations Change Over Time

Mostly Uncle Frank [23:54]

The correlations between two assets are frequently different depending on what kind of macroeconomic environment you're in. That's where correlations come from. That's why in a year like 2022, when you're talking about high inflation, you see stocks and bonds exhibiting positive correlation, even treasury bonds. Whereas if you go to a recession environment, you'll see them exhibit negative correlation. So correlations change over time, but they're not random. They're based on the particular economic environment you're in and what assets you're talking about. Okay, moving on to what he calls lie number four. Diversification helps during bear markets is the lie that he's trying to debunk. And here's also a good example of where he's basically found an analysis to match the conclusion. And this is interesting because in this part, he'd been previously talking about different asset classes and just the US market. Here he jumps to comparing with international funds. And he's correct that typically in bear markets, both US and international stocks are going to go down. And which one does worse depends on the strength of the US dollar. It is frequent that the reasons things are going down is because people are putting all their money into US dollars, and so the US dollar is strengthening. And so in a lot of bear markets, international stocks actually underperform US stocks for that reason, but it's all on this currency basis. Now, if you were to shift this analysis, instead of comparing US and international, you were comparing growth and value, you'd see something much different. And I'll put up a little thing from testfolio that illustrates this: comparing a large cap growth fund and a small cap value fund or allocations to those sectors over the course of I think it's 99 years or 39 years, some long period of time. And look at the drawdown stats for them. You'll see how, in a lot of circumstances where the growth goes down a lot, like in the 1970s or the early 2000s, or in 2022, the value stocks actually hold up pretty well. There's a lot of diversification going on there. So this alleged lie is true for some asset combinations, but it's not true for other asset combinations. And that is really why we care about holding a diversified portfolio that includes both growth and value tilted ETFs or stocks in them. Because that does help you a lot during bear markets. Especially the worst bear markets, like the one we saw in the 1970s after 1973-74, and then the one we saw in the first decade of this century. But he is correct that diversifying internationally is not likely to help you a whole lot during really bad times like that. Unless the dollar is weak. Alright, lie number five.

Expected Returns Still Matter

Mostly Uncle Frank [26:58]

He writes, with enough diversification, you don't have to worry about expected returns. And here's where he's taking swipes, mostly at Bill Bangin, but also at us people over here calling our portfolios exotic. Exotic. Dang! Idiot! If you want to see something exotic, look at what Larry Swedro invested. I'm afraid what we do here is very much off the shelf.

Voices [27:27]

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

Mostly Uncle Frank [27:32]

Now he does admit here, as he must, that gold shows intriguing diversification properties, as he writes, in most past bear markets performing well in deflationary and inflationary recessions. And so mixing in 10 to 15% in gold is helpful. And that's from safe withdrawal rate series number 34. What's interesting about that analysis is it is straight historical. Unlike a lot of the analyses he does where he changes parameters or monkeys with the data. In that one, he looked at the straight data and drew the conclusions from that. But I mean the real problem here is nobody's saying that with enough diversification, you don't have to worry about expected returns. Of course, you have to worry about expected returns. You can't have a portfolio that's all short-term bonds or something like that.

Voices [28:22]

Are you stupid or something?

Mostly Uncle Frank [28:24]

Ultimately, what you care about is the efficiency of the portfolio, which is a mixture of risk and reward, and that incorporates expected returns. What diversification typically does is not increase your expected returns, but simply reduce the drawdowns or the level of risk you need to take to get those expected returns. This is Markowitz efficient frontier stuff. So this alleged lie amounts to a straw man because nobody is saying that. Not me, not Bill Bangin, not anybody else.

Voices [29:00]

Forget about it.

Mostly Uncle Frank [29:02]

No, he does have a side note here that he recommends using the Sharp ratio, which is a measure of risk and return. And yeah, you can do that over at uh testfolio. It's very easy to look at sharp and sortino ratios and compare different portfolios. And so I'll put a link to testfolio because the portfolio he recommends is a 75-25 kind of portfolio. 75% SP 500 and 25% in bonds. When you compare that to something like a golden ratio or a golden butterfly portfolio, you find that it just has worse risk reward characteristics across the board, whether it's Sharp Sortino or anything else that you can think of would be meaningful. So you can go check that out if you'd like. And then finally, what he's got is line number six is you need diversification while accumulating.

Accumulation Rules Versus Retirement Rules

Mostly Uncle Frank [29:51]

And uh to the extent he's saying that you don't need anything besides stocks when you're accumulating, I agree with that. You actually have a form of diversification in that what you are sitting on is a pile of uninvested future cash when you think about it, because you're taking money that you earn over time and putting it into this portfolio. You can imagine another situation where you just had this big pile of cash and you were slowly feeding it into the market, which is effectively what you end up doing when you're putting money over a period of years into your 401ks or whatever. But yeah, you should be putting that in a hundred percent stock portfolio or as high a portfolio percentage as you can stomach and leaving it alone, because that will be the best accumulation strategy you can have. And that's why you don't want to use target date funds. But on the other hand, that doesn't mean that an SP 500 fund is some kind of magic investing button or shiny object that's superior to everything else. And he is mistaken by saying that you don't want any diversification in an accumulation portfolio because if that were true, then you would go off and stock pick and try to put all of your money in the thing you thought was going to grow the most, and maybe you put it down on chips in the last six to eight months, or maybe you put it down on software and lost, that turns into a gambling problem. So diversification across broad swaths of the market is still going to be helpful in accumulation, but you already get that by buying in ETF with a whole bunch of stuff in it. The reason that's also important is that we know from Hank Bessenbinder's work that in any given period there's only about 4% of the stocks in the stock market that are really driving most of the returns and trying to know which ones those are and which ones are going to be in the future because it changes which 4% they are, is a too difficult task.

Voices [31:45]

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

Mostly Uncle Frank [31:48]

And so that's why you want to be using broad-based index funds when you're in accumulation and and you don't need bonds or other assets like that. So hopefully that discussion did not put you to sleep.

Mostly Queen Mary [32:07]

It's only mid-afternoon.

Voices [32:09]

Well, I took the liberty of putting away something in your tea. What are you talking about? I'm putting you to sleep. Is there an antidote? Of course there is. Right here. But it'll cost you a guinea.

Options Hustles And Modern Blogging

Mostly Uncle Frank [32:24]

I don't frequently read that blog or really any blogs anymore, especially in the era of artificial intelligence. Blogs are becoming obsolete, actually. People are moving their things to Substack, at least the ones that are trying to gather an audience for subscription purposes. The most interesting thing he's doing over there is actually the one post I look for every year when he talks about his option strategy, because he's got a short-term option strategy. And that's really what his strategy is. Doesn't have much to do with most of the stuff we've been talking about. He's basically got a 75-25 portfolio as far as his main assets are concerned, but he's just underspending from there. So his strategy is don't spend much money. And so his net worth, as you can imagine, has gone up considerably since he started the blog in 2018. But he also has a effectively a hustle going on in terms of this options trading strategy, which is a short-term options trading strategy. I think he's using zero DTEs these days. But really, he's also branched that out because he's now registered with the SEC as an advisor. If you have a million bucks, you can give it to him and he can operate one of these strategies for you. And that effectively is creating a nice side income so he doesn't really have to touch his portfolio much and can let it grow. So I would check that out if you're interested in that sort of stuff. It reminds me kind of of the market wizards books, if you're familiar with those. This is written by Jack Schwager, and he basically looks for people who have developed unusual strategies in most cases, and have been very successful at it. I think the last one was called Unknown Market Wizards. But these are people who are doing all sorts of things, trading penny stocks and shorting them, and operating options strategies like this on a kind of a short-term trading basis. So I'll be curious to see how that all goes and whether that business develops into something. Maybe he'll end up being the next George Soros. Who knows? Anyway, hopefully that did not put you to sleep. And thank you for your email.

Voices [34:48]

Last off.

Mostly Uncle Frank [34:50]

Last off? We have an email from Aaron.

Voices [34:54]

Aaron! Where are you? Where is Aaron right now?

Mostly Uncle Frank [35:01]

I think we just had an email from Aaron. Well, we have another one. And Aaron writes.

Treasury Strips And Volatility Matching

Mostly Queen Mary [35:09]

Hi, Frank. I've heard you discuss long-term treasury strips funds like EDV and ZROZ on several occasions. You've noted that they're significantly more volatile than traditional long-term treasury funds, such as TLT or VGLT, but offer greater bang for the buck due to their extended duration and higher sensitivity to interest rate changes. With that in mind, why might it not be optimal to substitute a traditional long-term treasury allocation with one of these strips funds in order to free up more space for other assets in the portfolio? It seems like this would always be desirable. Are there any notable risks or drawbacks that might make this a suboptimal approach? Thanks for your insights, Aaron.

Voices [35:54]

AA ROM. AA ROM.

Mostly Uncle Frank [35:59]

Well, Aaron, yes, we've talked about this before, and lots of people do, in fact, use Treasury Strips funds as all or part of their bond allocation. And you ask why that might not be optimal. The reason it might not be optimal is they're more volatile than other kinds of bonds. And so in certain circumstances, say 2022, you were effectively adding more volatility to your portfolio. At least if you held them in the same percentages as you were holding something else. The solution there though is to reduce the percentage of, say, EDV or ZROZ that you would be holding instead of TLT or VGLT. And in terms of volatility matching, the strips funds tend to be about one and a half times as volatile as the standard long-term treasury bond funds. That relationship really doesn't show up though until you're actually talking about an environment where interest rates are moving either up or down. And then you'll see that relationship. When interest rates are kind of flat the way they've been right now, they tend to perform very similarly to treasury bonds, and the differences are kind of random because you're just talking about fluctuations in the yield curve. What you're effectively doing when you're using these things is almost like adding leverage to a portfolio, and that's the way I tend to think about it. It basically frees up space in the portfolio so you can add more other things. Oftentimes, those other things are things like stocks or managed futures or gold that have a higher expected return than treasury bonds, and may also be just as volatile or more volatile. So that's the way I tend to think about those things.

Voices [37:41]

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

Mostly Uncle Frank [37:47]

And for an example of that, you might just go back to episode 511, which we just did recently, talking about that levered Superman portfolio. Don't try that at home either. You have a gambling problem. But that's also why we have treasury strips and something like the OPTRA portfolio, which is intended to have higher risk and higher re reward.

Voices [38:20]

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

Mostly Uncle Frank [38:28]

I hope you don't have too many gambling problems after considering this.

Voices [38:34]

Well, you have a gambling problem.

Mostly Uncle Frank [38:37]

But hopefully that helps. And thank you for your email.

Voices [38:42]

You can't handle the gambling problem.

Where To Send Questions

Mostly Uncle Frank [38:45]

But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to Frank at RiskPartyRader.com. Then email us frank at riskpartywriter.com. Or you can go to the website www.riskparty radio.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, give me some stars, a follow, a review. That would be great. Okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Party Radio. Signing off.