Voices [0:00]

A foolish consistency is the hobgoblin of little minds, 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

Welcome And How To Start

Voices [0:18]

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. Ooh.

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. Zachos. 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 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 [1:53]

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 [2:03]

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 520. Today on Risk Party Radio, it's time for our weekly portfolio reviews of the eight sample portfolios you can find at www.riskparty radio.com on the portfolios page.

Voices [2:30]

But before we get to that I'm intrigued by this. How you say email? And first off.

Listener Email On Whole Life

Mostly Uncle Frank [2:40]

First off, we have an email from Wilson.

Voices [2:45]

Where's Wilson? Wilson, where are you? Wilson! Wilson!

Mostly Uncle Frank [2:58]

And Wilson writes.

Mostly Queen Mary [3:00]

Hi, Frank. Love your podcast and the way you strive to help us DIYs out there. I'll be waiting with bated breath to hear what soundbite you use for me, as there are quite a few options out there.

Voices [3:11]

You're not going to amount to Jack Squawks!

Mostly Queen Mary [3:16]

I've been an avid follower of the various financial independence podcasts and found your content and the concept of risk parity portfolios through them.

Voices [3:25]

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

Mostly Queen Mary [3:30]

After getting the personal finance bug, I've decided to pivot careers into financial coaching and advising.

Voices [3:36]

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

Mostly Queen Mary [3:42]

Because I'm transitioning my love of personal finance from a hobby to my eventual job, I've been connecting and learning from advice-only planners like Cody Garrett, Aubrey Williams, and the like.

Voices [3:53]

Excellent. Everything is going as planned.

Mostly Queen Mary [3:58]

I also want to keep an open mind and often see content from those with AUM or fee-based models. Uh what? I have engaged in conversations with some, and one says he suggests using permanent life insurance policy as buffer assets, and that the data shows higher withdrawal rates using this instead of bonds for fixed income.

Voices [4:21]

Hello, I'm Tommy Flanagan, and I'm a member of Pathological Liars Amandament.

Mostly Queen Mary [4:29]

He sent me some publications, but it's been difficult to find unbiased information not from insurance companies or their industry. The other thing he showed me was marketing materials from his firm, where a Monte Carlo analysis of the 4% rule led to a 40% failure rate.

Voices [4:46]

I'm also the official spokesman for NBC. Yeah, that's it. Who am I kidding? I'm the owner of NBC.

Mostly Queen Mary [5:00]

When I pushed, he said they used a 4% real rate of return in the analysis. If you have the intention of holding a well-designed whole life policy for a lifetime, do the risk-adjusted returns come out ahead of bonds?

Voices [5:20]

And I've been asked to clear up some of those ugly uh beautiful rumors about Saturday Night Live. Now, as you know, the ratings have been astronomical. Why better than the world uh the super the Cosby show?

Mostly Queen Mary [5:39]

I'm not considering IUL or VUL in this discussion, as those who are trying to combine investing with insurance, which is a bad idea.

Voices [5:47]

That is the worst idea I've ever heard in my life, Tom. Yes, it's it's horrible. This idea.

Mostly Queen Mary [5:54]

But for those with high enough income during accumulation to entirely max out on the 415C limit of workplace retirement accounts, Roth IRA, HSA, etc., does it make sense to use whole life in place of bonds in a portfolio? Unless we'll be pulled ahead. Yeah. I'm not even sure which bond type to compare the returns to. Short, intermediate, or long-term treasuries? Do we need to factor in liquidity risk and discount the returns of the whole life policy because of that? Put that coffee down. Wade Phoe's argument in the journal article is to use whole life or other buffer assets to protect against sequence of returns risk.

Voices [6:38]

Liar, liar, plants for hire. It's pants on fire, Patrick.

Mostly Queen Mary [6:44]

Well, you would know. Liar. Many of us in this community may prefer things like the risk parity portfolios, bucket strategies, or flexible spending to reduce SORR. I'll put the two publications that the advisor sent me below. FYI, I donated to the Father McKenna Center last week through my donor advice fund. Love the work they are doing. Thanks for your time. Kind regards, Wilson.

Voices [7:12]

I'm coming! Wilson! Well done!

Charity Update And Matching Funds

Mostly Uncle Frank [7:20]

Well, first off, Wilson, I owe you an apology because you sent this in January and you're a donor to the Father McKenna Center, and I failed to move it to the front of the line. So my sincere apologies for that. As most of you know, we do not have any sponsors on this program. We do have some charity we support, including Fairfax Casa and the Father McKenna Center, which supports hungry and homeless people in Washington, D.C. Full disclosure, I am the chairman of the board of the Father McKinnon Center. Am I right, Stephen Eighty? Yes, you are, Frank.

Voices [7:52]

Absolutely, Frank!

Mostly Uncle Frank [7:53]

You bet I am. As we discussed in episode 518 at length, we are running the second running of the Top of the T-shirt campaign for the Father McKenna Center right now. We have two listeners who have put up $25,000 in matching funds, and we are working on matching that, if not beating it.

Voices [8:12]

Yes!

Mostly Uncle Frank [8:13]

This is all in support of our annual Walk for McKenna, which occurs in September. But before that, we make the t-shirts with the biggest donors, and we put the biggest donors on the back of the t-shirt. Risk Parity Radio was the largest donor for the Walk for McKenna last year and duly went to the top of the t-shirt. You can check that out on our support page at www.riskparodyradio.com. And we're trying to do that again.

Voices [8:38]

That is the straight stuff, O Funkmaster.

Mostly Uncle Frank [8:41]

So if you'd like to help out, we're gonna put that link in the show notes again. And make sure that when you give your donation, you mention Risk Parity Radio or Top of the T-shirt campaign so that we can duly count your donation for matching purposes. In any event, you're supposed to go to the front of the email line if you donate, as Wilson did not do here, and that's why I'm apologizing for it now. But now that I've seen it, I did move you to the front of the line, and I thank you very much for your support. Now getting to your

Incentives Behind Insurance Sales

Mostly Uncle Frank [9:12]

email. It sounds like you've been talking to some people that make money from the sale of insurance because that is generally why a financial advisor would be recommending insurance products. That's the way this works. So if you're looking to be part of the financial services industry and you want to make a lot of money, yeah, peddling insurance products is a way to make a lot of money in the financial services industry.

Voices [9:56]

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

Mostly Uncle Frank [10:04]

That is why the largest purveyors of products either are all commissioned all the time or they do hat switching. And so they do their fiduciary part of the time, and then they take that hat off, and then they sell products and get commissions from them. And that is a very lucrative way of making money. That's the way it works. That's life.

Voices [10:41]

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

Mostly Uncle Frank [10:51]

But they're not doing it out of the goodness of their heart. Everything that has transpired has done so according to my desire. So the real question there is, what are you willing to do to make a buck?

Voices [11:06]

Over the next 21 days, you're all gonna experience intense mental and physical strain.

Mostly Uncle Frank [11:17]

Are you willing to throw fiduciary duties aside and just sell products?

Voices [11:22]

Do you have life insurance, Phil? Because if you do, you could always use a little more. Right? I mean, who couldn't?

Mostly Uncle Frank [11:29]

Because if you are, that's fine. But I don't have any respect for people like that. I would not recommend people like that. In fact, people like that are the biggest problem we have with the financial services industry.

Voices [11:42]

Matt Ryerson, I dated your sister Mary Pat a couple times till you told me not to anymore.

Mostly Uncle Frank [11:47]

And whomever you've been talking to is a person like that. And I think they suck.

Voices [11:53]

Am I right or am I right or am I right? Right, right, right.

Mostly Uncle Frank [11:57]

And so if you want respect from people like me, maybe you don't care about that. Most people don't, then you should be a fiduciary, fee-only advisor, or advice only, that doesn't show insurance products and doesn't collect AUM.

Voices [12:14]

Wilksake, I drink it up every day. I drink it up.

Mostly Uncle Frank [12:20]

Because believe it or not, even I get solicited by these people every single week to come on here and shill junk to you.

Voices [12:30]

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

Mostly Uncle Frank [12:37]

And the answer is always the same. No way.

Voices [12:42]

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

Mostly Uncle Frank [12:48]

But as you can guess, I'm not here to make life nice and easy for financial advisors or suck up to people in the financial services industry so they can be on my podcast or I can get ads from them or something like that.

Voices [13:01]

Forget about it.

Mostly Uncle Frank [13:03]

But

How Consumers Get Sold

Mostly Uncle Frank [13:04]

now let's talk about this from the perspective of a consumer, because I assume you're also a consumer of financial products and services. So the way I look at financial advisors and the people that support them in the financial media, including a lot of podcasters, by the way, is that the financial advisors are like restaurant owners. They run restaurants, they sell things to the public. The financial media is like a restaurant supply company. A lot of podcasters who are in bed with financial advisors or are financial advisors themselves are part of that restaurant complex.

Voices [13:40]

Tina, you fat lard, come get some dinner.

Mostly Uncle Frank [13:43]

My relation to that restaurant complex is I don't own a restaurant. I don't want to own a restaurant, I don't want to supply things to restaurants. I do like to eat at restaurants. So my relationship to restaurants is I'm the food critic.

Voices [13:57]

What is that? It's like Bobby's vomit. It's like purple snot.

Mostly Uncle Frank [14:04]

Either you're doing a good job or you're not, and I'm gonna tell you to your face. Get over it.

Voices [14:10]

Here's your burger, sir. Thank you. Sir, I need another $1.25. Is that right? Keep the change.

Mostly Uncle Frank [14:19]

Roadhouse. If you sell things on commission, that's like serving sewage. If you're a hat switcher, sometimes you're a fiduciary, sometimes you're not, then you're selling sludge. Neither one of them is attractive. If you're an AUM advisor, what you're telling me is you have dirty plates. And your staff is eating the food in the back before they serve it off the plate. So we're not playing that either. So now let's talk about this from the perspective of a consumer of financial products and services. Let's talk about something important. Okay, going to somebody who sells insurance is like going to a car dealer or going to buy a suit or a pair of shoes. If you go to a car lot and say, hey, I'm open-minded. What do you got to sell me? What do you think I should drive? I'm not a smart man. Guess what? They're gonna sell you the most expensive thing they can so they can make the most money off you they can. Same if you go buy a suit, same if you go buy some shoes, same if you go get a haircut. Of course they're gonna say you need it. Of course they're gonna sell you the most expensive one they can.

Voices [15:52]

You see, you're like a a shopping savant. And every day, women come in here with all the money in the world and no clue what to spend it on. You could help them. You mean like a personal shopper job? No, do not think of it as a job. For you, my dear, it is a calling. I don't know. Employees get a 40% discount. Hi, welcome to Cumberlease. My name's Gabrielle. Can I help you?

Mostly Uncle Frank [16:19]

You're not supposed to be open-minded when you go to those places. Because you know what open-minded means in that context? It means you're gullible. It means you're a rube. It means you can be sold. It means Mr. Krabs is going to be very happy to see you.

Voices [16:37]

Ah, the sweet smell of an old day sucker.

Mostly Uncle Frank [16:42]

So you need to approach the financial services industry with some critical thinking skills and with an understanding as to how their business models work and what their incentives are. Because, as we know from Charlie Munger, the behavior follows incentives.

Voices [16:59]

I don't care about the children. I just care about their parents' money.

Mostly Uncle Frank [17:03]

And that applies double to people in the financial services industry or people who write the things that you attached to this that you were given as objective material that is clearly not objective at all.

Voices [17:18]

No more flying solo. You need somebody watching your back at all times.

Mostly Uncle Frank [17:23]

And I don't care if it was written by Wade Fow, he's not an objective person. He shills insurance products.

Voices [17:31]

Oh, have I got your attention now?

Mostly Uncle Frank [17:34]

He slants his analysis to make insurance products look better. That's how he makes his money. Get over it.

Voices [17:43]

AIDA, attention, interest decision, action. Attention. Do I have your attention?

Mostly Uncle Frank [17:50]

Stop worshipping names and start advocating for yourself and your family.

Voices [17:56]

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

Mostly Uncle Frank [18:00]

Now,

Thermodynamics And Why Returns Shrink

Mostly Uncle Frank [18:01]

the first thing you need to understand about insurance products is they're not investments. Insurance products are not investments, they are contracts. And there is no way an insurance contract is going to make underlying investments perform better. The mental model here that you should be applying, again, Charlie Mungering this, is the first law of thermodynamics. Didn't expect that one, did you?

Voices [18:26]

Surprise, surprise, surprise!

Mostly Uncle Frank [18:29]

Okay, the first law of thermodynamics has conservation of energy. There's no such thing as a perpetual motion machine. Whatever energy you put into a machine or a system, say a generator, a diesel generator, the energy you get out of that is going to be less than the energy you put in because some of it's going to be dissipated by heat. You're never going to get out more energy than you put in, and you always are going to get out less depending on the efficiency and friction involved in the machine. Now let's apply this model here. If you apply this model here, the money you're putting into this insurance contract is the energy you're putting into the machine. Now think of two machines. You can put it in the machine that has the insurance contract up front. What does the insurance company do with that money? Well, they don't have a magic money printing perpetual motion machine in the back. What they do is they go invest that money. What do they invest it in? Common financial investments, usually relatively conservative ones. Stocks, bonds, real estate, a few other things. You can find out what an insurance company invests in just by looking at their annual reports. They have to report that stuff if they're a public company. And it has to be conservative enough to comply with their regulations. It's not magic. It's the same investments. So they cannot pay you any more out of the insurance contract, no matter how it's structured, than the money they are making by investing that money. However, they're investing it. What are the sources of friction? Well, you've got the real purpose of the insurance contract, which is to have a payout at some point. It's life insurance. When somebody dies, there's got to be a payout. There's got to be commissions that are paid. There's the cost of the insurance. There's a lot of friction in this. All of that needs to be subtracted from whatever they can make by investing the money. So there's a lot of friction and a lot of money that's taken off of whatever they're making out of the investments. All right, now compare that to a different machine where you don't have the insurance contract in the middle. You're just investing the money in the same things the insurance company is investing in. Which do you think is going to give you a more efficient result? You just take the profits, returns from the investments themselves, or you shove it through an insurance contract and rip out all kinds of commissions and other fees. Which one do you think is going to yield the most? There is no way that insurance products, contracts shoved between you and investments are going to increase the yield of those or increase their performance in any way. Insurance contracts are not a perpetual motion machine. They don't increase the returns you would get. They have to decrease the returns you would get. You're always going to get less out of the contract than you would by just making the investments yourself. Once you understand that. You don't need to waste a whole lot of time saying, Oh, is it better for me to put my money in this insurance contract so they can invest the money and pay me some portion of that? Or can I just make the stupid investment myself in the bonds or whatever they are?

Voices [22:16]

Are you stupid or something?

Mostly Uncle Frank [22:23]

The answer is obvious. There is no way under the sun that any combination of insurance contracts is going to outperform the same investments made by the company or that you can make yourself. If you believe that there is, you are believing in perpetual motion machines. You are believing that energy can be created out of thin air. You are effectively violating the first law of thermodynamics.

Voices [22:46]

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

Mostly Uncle Frank [22:51]

You know, I have a friend who's a patent attorney who once submitted a claim, a patent claim, where he wrote the words and it tends to perpetuate the motion. His claims were rejected and had to be rewritten. You want to know why? Because there is a provision in the patent code that says you may not patent things that violate the laws of physics, and this looks like a perpetual motion machine. So it's not patentable.

Voices [23:15]

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

Mostly Uncle Frank [23:19]

All right then. So we know these perpetual motion machines called insurance contracts don't actually work and can't work in real life. But how are they sold? How are they dressed up to make it look like they are perpetual motion machines, real perpetual motion machines that magnify your money in some magical way? You're a wizard, Harry. I'm a what? Harry, you're a wizard. Here's how they do it. And you'll see this in just about every kind of sales pitch or marketing materials or quote studies, unquote, like the ones you gave me, are written. Just clap! What they do is they make assumptions to make the other alternative look really bad. So if the other alternative is bonds or stocks or a portfolio, they make assumptions to make that look really bad. They also make tax assumptions to make the alternative look really bad. And if they make enough of these assumptions and compound them, they can make just investing the money look worse than investing the money through an insurance contract. They're lies, damn lies, and the stuff that is given to you by the financial services industry, like the things that you cited here. Just clap! All right. Let me show you how you look through one of these things to pull out the bogus assumptions.

Spotting Bad Assumptions In Studies

Mostly Uncle Frank [24:50]

Let's take this one from Fow and Finky it's from April of 2019. So they construct this scenario with these 35-year-olds named Steve and Susie. Stupid Steve and Stupid Susie, I guess. Because they have him do a whole bunch of stupid things. Just how dumb are you? It varies. One of the stupid things that stupid Steve and Stupid Susie are doing here. And they're doing this between the ages of 35 and 65 when Steve is supposed to retire. That's the setup here. So the first stupid thing that stupid Steve and stupid Susie are doing is investing in target date funds. And as we know from the other research we've covered in episode 333 and elsewhere, if you do that, you are probably going to end up with about 20% less money than if you just invested in index funds. So stupid Steve and stupid Susie are already screwing up their own retirement by doing stupid things. Or we're assuming they're doing stupid things. Alright, what's the next assumption? Next assumption is Steve expects to be in the 32% marginal tax bracket in his pre-retirement and post-retirement years. Well, Steve must not be trying to pay less taxes in any way whatsoever. There's almost no way that anybody with any sense who is not being stupid is going to be paying 32% in their tax bracket in their retirement years, even if they're spending hundreds of thousands of dollars. I actually just got our draft tax returns back from our accountant last week. We always get an extension because they're very complicated.

Voices [26:31]

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

Mostly Uncle Frank [26:36]

Anyway, you want to know what our effective tax rate is for this? For a federal, it's less than 10%. It was less than I thought because we got the full property tax reduction back. But in fact, we're paying less in federal taxes than we are in state and local property taxes this year. And chances are if you're making any effort whatsoever, you are not going to be in the same tax bracket in retirement as you are when you're working, especially if it's a 32% marginal tax bracket. So it's a really stupid assumption that doesn't apply to anybody with any sense. But it's there to make the insurance contract look much better. And in fact, that is almost always what is going on with these insurance contract presentations, is they monkey with the tax rates.

Voices [27:28]

That's the fact, Jack!

Mostly Uncle Frank [27:30]

And what's the next stupid thing Steve appears to be doing? Well, in the scenario where he's not buying the whole life policy, he's buying a 30-year term policy with this $400,000 death benefit. There's really no reason for him to be doing that. He's already got two kids, and he's not going to have more of them. The most he would possibly need would be a 20-year term policy, not a 30-year term policy, because by the time your kids are out of the house, unless there's somebody else to support there, you're going to have enough money saved up if you didn't put it in target date funds and aren't paying too much in taxes, maybe. Anyway, that's another stupid assumption. Now, what other stupid things are stupid Steve and stupid Susie doing here?

Voices [28:11]

For doing absolutely nothing longer than anyone else? Patrick! This trophy's for you!

Mostly Uncle Frank [28:23]

Oh, they're buying mutual funds with fees of a typical, quote typical, 0.84% average portfolio administration cost. Why are they buying these high-cost mutual funds when they can buy low-cost ETFs or low-cost mutual funds? And they're also paying, in addition, a financial advisory fee of 0.75% based on the value of the 401k assets under management. All right, why is somebody managing a target date fund in their 401k? Why do they need anybody to do that? How stupid are stupid Steve and stupid Susie? Why are we assuming these stupid things?

Voices [29:01]

You may be an open book, SpongeBob, but I'm a bit more complicated than that. The inner machinations of my mind are an enigma. Who wants a Krabby Patty at 3 in the morning?

Mostly Uncle Frank [29:16]

Oh boy, 3 a.m. The reason we're assuming these stupid things is so they can assess a total fee of 1.59% on all their investment assets. Only morons would be paying that for the situation they describe.

Voices [29:32]

Johnny, the truth is they're they're morons.

Mostly Uncle Frank [29:35]

Especially when these people obviously aren't optimizing their taxes in any way, shape, or form. But again, that makes the investments look worse and the insurance contract look better, as every one of these assumptions does. And then what they're assuming is that they're using the accumulated value in the whole life policy to borrow out of it whenever they're having a downturn in the stock market. Which means they're putting a drag on their value of the insurance contract because you do have to pay interest on that. And they just take it out of your value. It's another profit source for the insurance company. That's why it's a dumb strategy in multiple ways. If you want to borrow money against your assets, put it at someplace like Interactive Brokers, just borrow it against it on a margin account, and you can deduct all that interest. Which you can't do when you're paying back one of these life insurance contracts. That's the way you borrow against your investments. You don't use whole life policies for that. You don't need a contract. That's stupid. Stupid is stupid does, Miss Blue.

Voices [30:39]

I guess.

Mostly Uncle Frank [30:41]

If you want to hear a rant about that, go back and listen to episode 46. So let's see, are there any other stupid things they're doing? Oh, here we go. Yeah, they're holding some portfolio that they estimate has a 2.85% withdrawal rate. A 2.85% withdrawal rate. Why don't they just hold a better portfolio? Why are these people so stupid? You know what? They have them holding target date funds through retirement. That's what their assumptions are, and then they put some crystal ball assumptions on that to make it even worse. But I think you can see now how they lie with these studies.

Voices [31:16]

Liar, liar, plants for hire. It's pants on fire, Patrick.

Mostly Uncle Frank [31:21]

Well, you would know. Liar. Just by making assumptions that make the insurance contract look way better than it ought to look compared to the other alternative. Because that's the only way you can turn an insurance contract into a perpetual motion machine. But once you destroy these stupid assumptions, you recognize that the rest of it is garbage in, garbage out. Because if you're making ridiculous assumptions, of course you're going to get ridiculous outputs. And why should we even bother to look at them? How much time did you waste looking at the results instead of looking at the assumptions? That's how these things are presented. The results are presented. The assumptions are buried. That's how these things are sold.

Voices [32:05]

AIDA, attention, interest decision, action. Attention. Do I have your attention? Interest. Are you interested? I know you are, because you close or you hit the bricks. Decision. Have you made your decision for Christ? An action.

Mostly Uncle Frank [32:25]

And if you read the results and were going, oh, this looks good, and didn't read the assumptions, even you fell for it. You fell for it. And if you're going to be selling things, that's what you're going to be doing. That's your job. Go mislead people with this kind of stuff.

Voices [32:42]

AIDA, get out there. You got the prospects coming in. You think they came in to get out of the rain?

Mostly Uncle Frank [32:47]

Do you want to get paid for misleading people? Most of the financial services industry does. You have been well trained, my young apprentice. They will be no match for you. But you can see why this whole thing is garbage. If you want to be a garbage collector or a garbage promoter, be my guest. Because that's what your friend is. Maybe he wants some company.

Voices [33:12]

I want you to be nice until it's time to not be nice. Well, uh, how are we supposed to know when that is? You won't. I'll let you know. You are the bouncers, I am the cooler. All you have to do is watch my back and each other's. Take out the trash.

Monte Carlo Scares And Crystal Balls

Mostly Uncle Frank [33:36]

Now I look briefly at the other one, which is shorter. This is more opaque, but it's obviously got embedded assumptions in it that are probably inaccurate and are designed to make the alternative look worse. They say they're using some Morningstar moderate and aggressive lifetime allocation indexes. This is from 2021. I can tell you that Morningstar's assumptions are based largely on caped crystal balls like Vanguards are and make everything look worse than it actually has been. That's what's really funny about these things. They're old enough that you can tell just how bad these assumptions were.

Voices [34:14]

Gosh! Idiot.

Mostly Uncle Frank [34:16]

They're also making assumptions about fees and they're making assumptions about taxes. They assume that there's an advisory and investment management fee of 1.25%. Why? Nobody needs to pay that. They're assuming there's an annual equity turnover of 25%. You know what that means? That means they're assuming that this AUM advisor this person hires is going to be churning the account. But maybe that's what they do. Maybe that's what they think is appropriate. Is that what you plan on doing? And they assume that the initial taxable equity basis is 50% of the assets. I don't know where that assumption comes from. And they make some other tax assumptions that are likely not applicable as well, at least to somebody who's not actually being stupid.

Voices [35:04]

That's the stupidest thing I've ever heard. Well, maybe it is stupid, but it's also dumb.

Mostly Uncle Frank [35:11]

But I think you suspect this. I mean, you said you pushed him on what their assumptions were from his firm's marketing materials, claiming that a 4% rule leads to a 40% failure rate. Of course, it's a bad portfolio, but they're not even using a portfolio. They're using a 4% real rate of return in the analysis. That's a cape crystal ball. That's why people who run AUM shops and then also hat switch and sell insurance contracts love caped crystal balls. They love anything that makes the projections of stock market and bond market yields low for the future. They don't care about whether it's accurate.

Voices [35:59]

Watch out for that first step. It's and does it.

Mostly Uncle Frank [36:03]

All they care about is it makes their products and their plans look better. It's part of their marketing. It's not finance, it's marketing and psychology. And guess what? It works. At least for the broad swath of level two investors who believe that there are magic investing buttons and shiny objects out there, and advisors are gonna help them find them, and maybe some of them appear in the form of insurance contracts, otherwise known as perpetual motion machines.

Voices [36:34]

Am I right or am I right? Or am I right? Am I right? I gotta go.

Mostly Uncle Frank [36:38]

So in the end, you're asking the wrong question, which is if you have the intention of holding a well-designed whole life policy for a lifetime, do the risk-adjusted returns come out ahead of bonds? What is a well-designed whole life policy? Which policy are you talking about? These are contracts, they're all different. Just come up! Do they come out ahead of bonds? The answer is going to be no. But that's not even the right question. The question is whether they belong in a diversified portfolio, which they don't. You can't rebalance them. They have an automatic drag. They're there for a different purpose.

Frank’s Own Whole Life Numbers

Mostly Uncle Frank [37:14]

But you know, I do actually own one of these, quote, well-designed life insurance policies, unquote. Just come up! It's from our buddies over at Northwestern Mutual. Fortunately, it's a relatively small policy. Part of my misspent youth, but it's all paid up, so I keep it around as a memento, like a little savings account. So according to my most recent statement, my cost basis for this policy, it's $130,000. That's all the money I put into it. I started putting money into it in 2004 and finished some years ago. Don't have to put any more money in it into it anymore. The accumulated value is $182,153. So that's a taxable gain of surrendered of $51,792. We can see that's a horrible return. Of course it's a horrible return. You gotta pay for all the insurance and everything.

Voices [38:10]

Yeah.

Mostly Uncle Frank [38:11]

Didn't you get that memo? The truth is, whole life policies are just glorified savings accounts, assuming you've actually paid them off. That's all they're good for. Just clap! And it was a financial mistake for me to buy the thing, but it was a small mistake, and I don't mind making small mistakes, because if you make small financial mistakes, you tend to learn a lot from those mistakes. And I've learned a lot about insurance products by having this whole life policy. This well-designed whole life policy. Just clap! Thankfully, it's just a tiny part of our total net worth. But no, it's not a substitute for bonds. No, it doesn't belong in a portfolio. No, the only reason people talk about that is because they can sell things and make a big profit off of it. Not because it's good for the consumer.

Voices [39:05]

Stop trying sniveling. Dope your nonsense. Every day I drink it up.

Why Advisor Models Rarely Change

Mostly Uncle Frank [39:16]

Now, are we ever going to convince the financial advisor world that their business models are not good for us? The answer is no, probably not. And this goes to Upton Sinclair's famous quote that it's difficult to get a person to understand something when their salary depends on them not understanding it. And that applies to all kinds of financial advisor behaviors. Whether it's profiting from the sales of various products, whether it's using the psychological comfort of various buckets, ladders, flower pots, and pie cake strategies. That's not designed as a risk mitigator for you. It's designed as a risk mitigator for them. Because the biggest risk for a financial advisor is that the clients will leave. That's the risk that they ultimately have to ameliorate. And that is why, particularly AUM advisors will defend their models against all comers, will defend their process against all comers, regardless of whether they're actually efficient or good or not. Because once they've come up with a process or a business model, they really can't change it all that much. Because if they did, they would be admitting that they're not doing right by the clients they currently have who might be wondering if there's a big change. Hmm. If he says that we haven't been doing the right thing and now there's a change, maybe I should go somewhere else. There are just a lot of bad incentives in financial advisor service models. And that is why overall it's a terrible industry that is sales-based and does not have the guardrails that you're going to get from people with professional codes like lawyers and doctors.

Voices [41:19]

Drink your or milk ain't drink it up.

Mostly Uncle Frank [41:25]

Because you're ultimately dealing with salespeople most of the time, and you need to decide whether you want to be a fiduciary advisor who only takes fees from their client on the hour of the job, or if you want to be a salesperson.

Voices [41:41]

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

Mostly Uncle Frank [41:47]

Because if you try to be both, you're just going to be compromised. So, hopefully that helps learn you a little something. Thank you for being a donor to the Father McKenna Center. And sorry again I didn't get to this earlier. And thank you for your email.

Voices [42:31]

Second off.

Quick Listener Notes And Thanks

Mostly Uncle Frank [42:33]

Second off with an email from Tim. Let's say Oh, I know. How about the new student, Timmy? Timmy. And Tim writes.

Mostly Queen Mary [42:45]

Frank. While suicidal tendencies may not speak to the median risk parody listener, know that I thoroughly enjoyed and it inspired me to listen to the full song this morning. I was sure to shout, It's not a phase, Gwen, in response to her completely minding her own business. Keep up the good work, Tim.

Mostly Uncle Frank [43:06]

Ah yes, suicidal tendency. I believe that song is institutionalized. But thank you for being a good supporter on the Also donated to our chairs.

Voices [44:16]

Last off.

Mostly Uncle Frank [44:18]

Last off of an email from John.

Voices [44:21]

How about John? That's nice and simple.

Mostly Uncle Frank [44:24]

What are you serious?

Voices [44:26]

Well, yeah.

Mostly Uncle Frank [44:27]

John, you want to do that to the kid? And John Wright?

Mostly Queen Mary [44:32]

Hi, Frank and Mary. Love the pod. Back during COVID, we bought $50,000 in I bonds when the interest rates were up. Those rates have fallen now. I need to add to my bond allocation. I generally track the golden ratio. Should I buy more I bonds outside of my IRA or add VGLT inside my IRA? Is there a limit to how far I should let the interest rates fall before I sell them? Thanks for all you do, John.

Voices [44:59]

Hey, John, hey, let's go to the John. Huh, John, let's go.

I Bonds Or Treasuries For Allocation

Mostly Uncle Frank [45:04]

Okay, John. Well, I bonds are just kind of like CDs with a variable interest rate. So they're an okay place to park some cash, but they're really not something that you can employ in a portfolio because they really don't function as long-term investments. So the real question is, do you want to keep this as some kind of emergency fund or flower pot full of cash for whatever reason? Or do you want to put it as part of your portfolio? Because if you want to make it part of your portfolio, yes, you would buy bonds that actually go in the portfolio, in this case the golden ratio, and you would do that inside your IRA. And then if you don't need to keep this in cash, you would invest the money outside the IRA in stocks or something else for the purpose of tax location. So the way you would do that is kind of a reverse asset swap. You would take the $50,000 from the I bonds, buy stocks with them in your taxable account, and then go over to the IRA, sell an equal number of stocks in there, and buy the bonds with them in there. And I wouldn't worry about whether interest rates are going to rise or fall or whether you can predict them.

Voices [46:21]

The crystal ball can help you, it can guide you.

Mostly Uncle Frank [46:25]

Because we shouldn't need to rely on crystal balls about interest rates to make investments.

Voices [46:31]

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

Mostly Uncle Frank [46:40]

And so I suggest you not try to do that.

Voices [46:43]

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

Mostly Uncle Frank [46:48]

That is one of the kind of odd things that level two investors often think they can do. They'll recognize that I can't predict what the stock market's gonna do next year, but for some reason, maybe it's because they've been watching too much financial TV or media, they think that we can predict the direction of interest rates. If you could actually do that, you could become fabulously wealthy trading options on treasury bonds in a very short period of time. But nobody can do that. Not me, not you, not the guy on the TV.

Voices [47:21]

You can actually feel the energy from your ball by just putting your hands in and out.

Mostly Uncle Frank [47:27]

And if you hear people making predictions about it and they happen to be right, guess what? They were lucky. Lucky? So put away your crystal ball, dispense with the i bonds if you really don't need them for a cash holding. And I think you'll be just fine. Hopefully that helps. And thank you for your email.

Voices [47:46]

I just wanted to have a happy childhood too, but long John Silver, I mean, I don't know what to say. Now we are going to do something extremely fun.

Weekly Portfolio Performance Review

Mostly Uncle Frank [47:56]

And the extremely fun thing we get to do now is our weekly portfolio reviews of the eight sample portfolios you can find at www.riskperirare.com on the portfolios page. But just looking at where the markets are this year so far. S P five hundred represented by the fund VOO is now up ten point zero eight percent for the year so far. The NASDAQ, represented by the fund QQQ, is up twenty point seven one percent for the year so far. And I believe that's really all on the chip stocks. If you look at the Mag 7 or just large cap growth in general, it's not up anything like that at all. Small cap value continues to perform just as well or better.

Voices [48:40]

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

Mostly Uncle Frank [48:43]

Our representative fund VIOV is now up 17.97% for the year so far. And a fund like AVUV is also up over 20%.

Voices [48:54]

I gotta have more cowbells. I gotta have more cowbells.

Mostly Uncle Frank [48:58]

Gold has crashed back down to earth. Representative fund GLDM is now down 2.26% for the year so far. Long-term treasuries represented by the fund VGLT are now up 1.02% for the year so far. REITs represented by REET are up 9.76%. Commodities continue to lead the way, even though they pulled back. Representative fund at PDBC is up 24.53% for the year so far. Preferred shares represented by the fund PFFV are up 3.12% for the year so far. And managed futures are managing to do better than we generally anticipate. Representative fund at DBMF is up 10.63% for the year so far. Now moving to these portfolios, first one's the all-season's portfolio. It's a reference portfolio. It's only 30% in stocks and a total stock market fund. 55% in intermediate long-term treasury bonds, and remaining 15% in golden commodities. It is down 0.97% for the month of June. It's up 5.19% year to date, and up 29.68% since inception in July 2020. Moving to these kind of bread and butter portfolios, first one's golden butterfly. This one is 40% in stocks and a total stock market fund and a small cap value fund. 40% in treasury bonds divided into long and short, and the remaining 20% in gold, DLDM. It's down 1% for the month of June. It's up 5.62% year to date, and up 68.52% since inception in July 2020. Next one's golden ratio. This one's 42% in stocks divided into a large cap growth fund and a small cap value fund. 26% in long-term treasury bonds, 16% in gold, 10% in managed futures, and 6% in cash and a money market fund. It's down 1.21% for the month of June. It's up 6.25% year to date and up 64.05% since inception in July 2020. Next one's a risk parity ultimate. Not going to go through all 12 of these funds. But it's down 1.06% for the month of June. It's up 6.46% year-to-date, and up 48.76% since inception in July 2020. Now moving to these experimental portfolios.

Voices [51:23]

Tony Stark was able to build this in a cave with a bunch of scraps.

Mostly Uncle Frank [51:30]

All of these involve leveraged funds. I don't try this at home. Even though I know some of you do.

Voices [51:37]

You have a gambling problem.

Mostly Uncle Frank [51:39]

First one's the accelerated permanent portfolio. This one's 27.5% in TMF. It's a levered bond fund. 25% in UPRO, it's a leverage stock fund. 25% in PFFV, a preferred shares fund, and 22.5% in gold. It's down 1.72% for the month of June. It's up 6.78% year to date, and up 31.79% since inception in July 2020. Next one's the aggressive 50-50. This is the most levered and least diversified of these portfolios, and by far the worst performer. It's one-third in a leverage stock fund UPRO, one-third in a levered bond fund TMF, and the remaining third in ballast in a intermediate treasury bond fund and a preferred shares fund. So it's down 0.54% for the month of June. It's up 7.8% year to date, and up 5.96% since inception in July 2020. Next one's a levered golden ratio. This one's a year younger than the first six. It's 35% in NTSX, that is a composite levered fund of the S P 500 and Treasury bonds. It's got 15% in AVDV, International Small Cap Value Fund. 20% in gold, 10% in KMLM, which is a managed futures fund, 10% in TMF, a levered bond fund, and the remaining 10% in a levered fund that follows the Dow and one that follows a utilities index, 5% each. It is down 1.9% for the month of June. It's up 6.81% year to date and up 28.03% since inception in July 2021. And moving to our last one and newest one, this is our return stacked portfolio, the Opter Portfolio. One portfolio to rule them all, and it is ruling them all.

Voices [53:33]

One ring to rule them all. One ring to find them. One ring to bring them all. And in the darkness, I'm them in the land of all where the shadows lie.

Mostly Uncle Frank [53:54]

It is 16% in UPRO, that's a levered SP 500 fund. 24% in AVGV, that's a worldwide value tilted fund, 24% in GOVZ, a Treasury Strips Fund, and the remaining 36% divided into gold and managed futures. It's down 1.79% for the month of June. It's up 10.77% year-to-date, and up 42.92% since inception in July 2024. So it's up over 20% per year so far.

Voices [54:27]

Well the frickin' guy.

Mostly Uncle Frank [54:31]

And that concludes our weekly portfolio reviews.

Voices [54:35]

I'm putting you to sleep.

Contact Info And Final Requests

Mostly Uncle Frank [54:38]

But now I see your signal is beginning to fade. If you have comments or questions for me, please send them to Frank at RiskPartyRader.com. That email is Frank at RiskPartyRoad.com. Or you can go to the website www.riskparty.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.

Voices [55:14]

I'm sitting in my room. I go up there. What's the time?

Mostly Queen Mary [56:34]

The Risk Parity 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.