Cold Open And Podcast Ground Rules

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.

Mostly Uncle Frank [1:14]

Top men. And you can find those on the episode guide page at www.riskparodyradio.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]

Light in the French.

Mostly Uncle Frank [2:13]

But now onward, episode 521.

Michael’s Early Retirement Numbers

Mostly Uncle Frank [2:17]

Today on Risk Party Radio, we're just gonna do we do best here, which is attend to your email.

Voices [2:24]

Inconceivable!

Mostly Uncle Frank [2:26]

And so without further ado.

Voices [2:28]

Here I go once again with the email.

Mostly Uncle Frank [2:31]

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

Voices [2:38]

What's this stuff? I'm not gonna try it. Let's get Mikey. Yeah.

Mostly Uncle Frank [2:45]

And Michael Wright.

Mostly Queen Mary [2:47]

Hi, Uncle Frank and Queen Mary. I just made another donation to the Father McKenna Center and the Top of the T-shirt campaign, and I'm glad to support that for a second year. Yeah, baby, yeah! I also made a donation to Fairfax Casa, as Queen Mary is definitely supporting another worthy cause as well. Fidelity Charitable says that both organizations are set up for EFT transfers from my donor-advised fund, so the donations should be there in short order. Additionally, many thanks for evaluating my portfolio back in episode 437.

Voices [3:23]

You're all right!

Mostly Queen Mary [3:25]

I'm happy to report that after another year later it has returned the equivalent of an 8515 stock bond portfolio overall, but with the ULCER index of only a 6040, so I remain very pleased with its behavior.

Mostly Uncle Frank [3:39]

That's what I'm talking about.

Mostly Queen Mary [3:40]

Still obviously too early for final judgments, but almost three years in it's doing well. Now, on to my question. Many thanks to Luke. I dug back through lots of old transcripts with references to annuities and bond letters, and I don't think you've directly spoken to my current topic yet. And apologies for the length in advance. I'm 55 and I've decided that I want to retire from IT no later than next Memorial Day. My project this summer is to develop a specific financial plan for how to make that work. I've tracked my expenses for years and know I'll have about $75,000 of fixed expenses, and then I plan to have a bucket of an additional $100,000 to cover everything that could be variable and at least somewhat controllable each year, including vacations, gifts, taxes, health care, health care insurance, home projects, car replacements, etc., so a total budget of $175,000. I had previously thought that I'd need about $3.5 million investable to support this at a 5% rate, which I'd run a risk parity portfolio to support. And I'm almost at that target now. My key concern has been that I'm still a long way from Social Security and even longer from Medicare, so the plan needed to feel safe enough that I wouldn't develop ulcers in the first 10 years if the stock market returns were crummy. But I had never taken the time to run the numbers on period certain SPIA annuities or bond letters before as a potential way to help with this. And when I did last week, the numbers seemed so helpful that I wonder if I'm doing something wrong here, or whether I should have been looking at this a long time before now. So, option A is obviously a $3.5 million portfolio at 5%, which would be a $175,000 draw. But for option B, if I go to immediateannuities.com, I can apparently get a five-year joint life period certain annuity for $300,000 that'll pay us almost $67,000 a year. Annualize, that would leave us with only $107,000 in expenses that we need to cover from a $3.2 million risk parity portfolio, which is a super low 3.4% drop. At the end of the SPIA, I'd be almost at early access to Social Security, and I could evaluate again whether it made sense to do another five-year SPIA to essentially get me past Medicare age and almost to 67, or take early Social Security or just live off the portfolio alone. The yearly tax effects don't seem bad at all, because only a very small part of the distributions would be taxable each year, leaving open the options to Roth convert or to try to stay under the healthcare subsidy limits. And inflation shouldn't be a big issue on only a five-year window. So what am I missing? And why would I not choose to do this? Since you sometimes narrow your answers if emailers don't provide enough context about their situation, here's a few quick hits. 1. A bond letter may do the same thing, but if anything happens to me, I'd already be leaving the risk parity portfolio management to my kid to handle for his mom. And unless there's a big benefit to the bond letter, the spia seems much simpler to manage. 2. Although you've ranted on Wade Fow's Rista a few times, I took it myself to see if I might want to Bruce Lee something from it, and it essentially confirmed what I already know about myself.

Voices [7:22]

Stick it along, I'll figure it out, you know? I'm just working on myself.

Mostly Queen Mary [7:26]

I'm about halfway on the scale between safety first and probability based because I'm not diametrically opposed to having some sort of contractually based arrangement for my fixed retirement expenses. It's just that everything I've ever looked at had too much milkshake drinking for the value.

Voices [7:51]

And starts to drink your milkshake. I drink your milkshake.

Mostly Queen Mary [8:01]

I drink it up! And I'm right at the optionality max on the optionality commitment scale because I definitely dislike being able to revisit bad decisions I've made in the past, and that's why I'm looking at the five-year SPIA instead of a 10-year. 3. Now that I'm 55 and about to pull the trigger on all this, I'm admittedly developing a case of pension envy, seeing my former government employee neighbors not be nearly as worried about their investment portfolios because a decent chunk of their expenses are already covered every month. And four, I live on the coast in an area where the median age is almost 62 years old, so I'm reminded every day that I'm not getting any younger, and I strongly prefer any financial arrangement that allows me to comfortably spend more early versus hoarding for later, while also being able to sleep at night. Is there something I'm missing about these period certain spias that I shouldn't seriously be considering one for my situation pre-Social Security? Also, on an unrelated note, I'm pretty sure you mentioned an interest in Big Earn's option trading strategy on a recent podcast, but I couldn't dig up the exact episode. I'm not following his exact strategy, but I started tinkering with selling out-of-the-money covered calls on SPY, TLT, and GLD with 30 to 60 day DTEs in my retirement accounts earlier this year and buying them back at a 40-50% profit target or when they get 7-14 DTE. You have a gambling problem. It's returned about 4.5% on the underlyings without ever having my shares called. It's still way too early to tell if 4.5% is an expected return long term, but even if it's a chunk less than that, it seems a lot more efficient use of my time for additional cash in retirement than putting up golf carts or working part-time at Home Depot. Many thanks for everything you do, Michael.

Voices [9:55]

Mary, Mary, I need you again.

Charity Donations And Matching Funds

Mostly Uncle Frank [10:03]

Well, nice to hear from you again, Michael. And thank you for being a donor to our Top of the T-shirt campaign. As most of you know, we don't have any sponsors on this program. We do support a couple of charities. Fairfax Casa for Mary and the Father McKenna Center for yours truly.

Voices [10:19]

I'm voting for yours truly.

Mostly Uncle Frank [10:20]

Well, I'm voting for yours truly too. Full disclosure, I am on the board of the Father McKenna Center. The Father McKenna Center supports hungry and homeless people in Washington, D.C., and we are currently working on a campaign to get to the top of the t-shirt for our walk for McKenna that we're going to have in September. And we talked about that at length in episode 518. So we have two listeners, Matthew 63 and 4J, yes, those are anonymous designations, who have put up $25,000 in matching funds that we're working on matching right now, and anything you give will go to that match and would be greatly appreciated. And of course, you get your main prize, which is to go to the front of the email line.

Voices [11:06]

Yes!

Mostly Uncle Frank [11:08]

I should say that our actual walk when we wear the t-shirts is on September 26th this year, on a Saturday in Washington, D.C., right around the center. Which is located at North Capitol and I Street. Optimus Bill says he's going to be making an appearance this year, all the way from Tennessee. I am Optimus Bill. Fortunately, he is bringing his wife Karen to ameliorate the shock of Optimus Bill, but we'll be very excited to see them as always.

Voices [11:47]

Now, first you have to look both ways. Okay, now second, you have to make sure the light is green. Okay, now it's safe to cross in.

Short-Term SPIA As A Retirement Bridge

Mostly Uncle Frank [12:04]

But now getting to your email, I did go back and listen to episode 437 where you wrote in before, with your risk parity style portfolio employing a little bit of leverage on the side.

Voices [12:17]

Well, you have a gambling problem.

Mostly Uncle Frank [12:20]

And it sounded good then, and I'm not surprised it's worked out pretty well since then. But now we're getting down to retirement launch date.

Voices [12:29]

Hello, Mrs. Farnickel, how are you today? Making a deposit, are we? Great. We can just put that into your retirement account and make it go to work for you, and it's gone.

Mostly Uncle Frank [12:39]

And just looking at where you are in the grand scheme of things, if you've got a $3.5 million investable portfolio, you plan to withdraw at a 5% annualized rate. And your fixed expenses, though, are only about 2% of the $3.5 million. You've really got a lot of leeway and a lot of wiggle room here. Because I also note you're not including Social Security in these calculations at all. Then the truth is you don't need Social Security in order to run this plan. Your Social Security is going to be like an added buffer or bonus. And you might even consider spending more money earlier, honestly, if that doesn't scare you too much.

Voices [13:20]

We got a scary one for you this week. It's that three-dimensional semi-classic Dr. Tongue's House of Cats. It's in 3D, so you'll have to send away for your special blesses.

Mostly Uncle Frank [13:33]

So if the base of your portfolio is a risk parity style portfolio with one of these high safe withdrawal rates, you have a lot of wiggle room to do a lot of other things around that that you may find more attractive psychologically, like this short-term annuity. And this plan with a short-term annuity is very similar to what it would look like with either a bond ladder or a CD ladder or any kind of essentially a pile of cash that is making some low level of interest for some period of time. And if the annuity gives you the best outcome there, then yeah, you can go with that. Just remember, pretty much all this is going to be taxable, or most of it's going to be taxable. I'm talking about the gains, not the principle itself. But you would effectively be taking less than 10% of the portfolio and putting it into a cash equivalent. That's the way I would look at this. I would not fixate on the particular instrument. And since it's less than 10% of the portfolio, as we've talked about many times, that is probably not going to affect your withdrawal rate in any significant way. What this is more likely to affect, and this is something that people really don't understand, is that the more cash you have in a portfolio, the more it tends to drag on its long-term performance, not its short-term performance. So what you're effectively giving up is growth long term, which you probably do not care about in this case because you're going to be having that social security come in long-term anyway.

Voices [15:01]

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

Mostly Uncle Frank [15:05]

And that's the way I would look at this. The Social Security coming in later gives you an option as to what you want to do now in terms of this cash allocation for short-term expenses. So you can go ahead and just do it.

Voices [15:19]

I do it. I just did it and I'm ready to do it again. Don't tell me you don't do it.

Mostly Uncle Frank [15:27]

Honestly, it's probably not going to matter much either way. And if it looks better than a bond ladder or some kind of cash pile, yeah, I'd go ahead and do that. Just make sure you understand the terms of this contract because that's what this is. It's a contract for them to pay you some money with some interest on it. And if you compare this to something else, you're probably talking about a few thousand dollars a year, not tens of thousands of dollars of a year. But it's always good to go price these things. I would say the only reason you wouldn't do this is because you're more worried about long-term growth. But I wasn't clear what kind of portfolio you were holding and if it's, you know, the equivalent of sixty percent in stocks or something like that. I don't think you're gonna have a problem with long-term growth either, especially when you account for Social Security coming in later on. The question I might be asking myself is whether I can rejigger this and actually spend more money earlier. But you just may not be that comfortable dealing with that, and you may not find it necessary given what your living expenses are and what your plans are. But what you would be thinking about there is is there some big house renovation or some other thing I wanted to buy up front to go use? Maybe a giant RV or something if you're into that, or some expensive vacations you want to take. That's what I would be really thinking about here because you have lots of options. When you're thinking about these things, you really need to think of them on the scale of proportionality that this is not a huge part of your portfolio. It's not like you're putting 40% of your portfolio into some 10-year bond land or something like that. But it also illustrates why the first question you want to ask anybody when they're talking about their retirement plan or talking to an advisor about a plan is how much are we spending out of this? Because if the spending is low enough, then you can play all these psychological tricks on yourself to your heart's content. And it doesn't really matter because the real strategy is over-accumulate. It's not whatever products or ladders or buckets or flower pots you're putting these things into. As long as you're clear-eyed about this, I wouldn't have any trouble with it. Now, I would have trouble with it if you wanted to say spend money on one of your children's weddings. And I don't think you mentioned children, but let's just consider that for a minute. If you were to lock up your money in something like this, and it did prevent you from making some kind of large purchase or paying for some large expense that would be detrimental to your personal relationships, then it would be a bad idea. That's the way you should be thinking about this though. How does this relate to my real life goals and don't limit your goal to just spend $175,000 a year? Because the truth is you can probably spend a little more than that. Maybe not every year, but certainly some years. And so that's the only thing I'd really do here is sit down and think about life goals like that in the next five years and whether this would affect that or not. I doubt it would. After that, I'd go right ahead with this if it's psychologically attractive to you, because it's not gonna matter one way or the other in the end. Just do make sure you understand the terms of the contract you'd be entering into. But now let's touch on your other gambling problem.

Covered Calls And The Real Trade-Off

Mostly Uncle Frank [18:54]

So, what you've described is a covered call strategy, and that's not really a gambling problem at all. In fact, what it's really doing is reducing your returns in favor of some kind of earlier modified payout. That's all a covered call strategy actually does. That you are essentially cannibalizing future returns that you would get if you weren't doing that. Because what invariably happens is you get some kind of sharp movement where your stocks get called away or whatever asset you're using gets called away, and then you miss out on some of the gains that you would have gotten. And that's why when you look at these kinds of funds that do this sort of thing, they tend to decay over time and they tend not to perform as well as just holding the underlying thing and not doing the covered calls. Ben Felix has some good videos on this, but you will not really improve your overall returns using a basic covered call strategy. In fact, you'll probably reduce them. The only way of succeeding on that is doing some kind of trading where you are actually picking the spots so the calls expire just like right before they would get called away. And that strategy is a far cry from what Big Earn is doing because what he is doing is selling puts, in which case your losses are potentially unlimited. Those kind of strategies have been likened to picking up nickels in front of a steamroller because they tend to work just fine like 85 to 95% of the time, but that one time or those few times they don't work is when you have huge crashes and huge losses. So it's a very skewed strategy that you need to be a lot more careful with and make sure you have the necessary capital to support it and aren't taking too much risk. Big earn doesn't have a problem because he's not spending much money outside of that. So even if he lost a million dollars doing that in some horrific 2008 scenario, he would still be fine. But that's what I would be calculating, and you should always be calculating any kind of trading set strategy is not how much you can make and what the percentage is likely to be, but how much could I possibly lose doing this? And if that loss is acceptable and it's not going to change your lifestyle, then yes, you can go ahead and do something like this if you find it entertaining. Because if you don't find it entertaining, it will be work.

Voices [21:14]

Looks like you've been missing a lot of work lately.

Mostly Uncle Frank [21:16]

I wouldn't say I've been missing it, Bob. Usually the best way to handle this is to segregate off a part of the portfolio or assets that you're essentially willing to lose on whatever strategy this is, and stick to that. My history is to fiddle with things like this at very small scales for their entertainment purposes, but then usually I lose interest in them after a while. What I did this year is when the stock market crashed a little bit in March and the VIX went up above 25, I bought the ETF SVOL, S V O L, which just sells VIX options, but only takes about 20% of the exposure. That VIX options would have on their own. And so it's gone up a little bit and it's been paying out at some gaudy 20% annualized rate. And I'd planned to sell the position when the VIX got back down to 15, but the VIX hasn't gotten back down to 15 yet, so I'm still holding on to it until that happens. But that's life in the fast lane for me. It's about as fast as it gets, I'm afraid. Kind of like Rain Man in the driveway.

Voices [22:27]

Yeah, my dad lets me drive slow on the driveway. I'm an excellent driver. Are you sure that you drive these cars? Of course, only 28 miles on the Odometer since I drove it a week ago last Saturday. Should be more than 28 miles. Of course, today's Monday. I I I I always drive the car on Saturday, never drive on Monday.

Mostly Uncle Frank [22:46]

Anyway, I think you're in good shape regardless of whether you go through with the short-term SPIA or not. I'll be curious to see how it all works out since you've been doing this for a number of years now.

Voices [22:58]

He likes it! Hey Mikey!

Mostly Uncle Frank [23:02]

Thank you for being a donor to the Father McKenna Center and Fairfax Casa. And thank you for your email.

Rejecting Dividend Hype And Fund Picking

Voices [23:18]

Second off.

Mostly Uncle Frank [23:20]

Second off of an email from Rafi.

Voices [23:23]

This is Rolla Yellow. Nickname Rap. Weapon Visibility roll the muscle.

Mostly Uncle Frank [23:32]

And Rafi writes.

Mostly Queen Mary [23:34]

Hi Frank. Happy New Year. Thank you for your gift of time on this channel. I just started listening to your podcast and found it very educational. I am 52 and plan to early retire at 57. I am equity heavy and trying to diversify to gold/slash bonds and alternative in the next four years. Question, what do you think of the CEF, 80X's dividend and come and growth fund? It correlates with the SP, but it has a better risk return score and a dividend of 7.5% or so. P.S. Love the charity that you are supporting.

Voices [24:11]

You are seriously twisted. Thanks. When we're under attack, Rath and his brothers are destined to save the world. Sounds good to me.

Mostly Uncle Frank [24:20]

Well, Rafi, I looked at this fund. It's been around since 1984, and I just stuck it in test folio against a total stock market fund and a large cap growth fund and a small cap value fund. It's really a pretty bad fund. I don't know why you would want to invest in anything like this. Since 1984, it has a compounded annual growth rate of somewhere over 8% comparing to over 12% for the other funds I mentioned. It has a maximum drawdown of 71%. It should be yielding something more like 14 or 15% with that kind of drawdown characteristic. So I don't know what you're looking at in portfolio labs, but it's probably a limited set of data, I'm guessing. And it doesn't jive with the data I've seen. And so the question in my mind is why are you even looking at this? And the answer to me, I need to make a couple assumptions, but it seems pretty obvious. What is obvious to me is that you are what I call a level two investor. Level one is people that don't have enough money to invest. Level two is what the financial media plays to and what financial advisors typically market to. Level two investors believe that there are magic investing buttons and special shiny objects that if they go out there and find these magic investing buttons and shiny objects and pick them, their outcomes are going to be better. And specific funds are an example of a shiny object. Insurance contracts are another example. All manner of particular strategies involving particular financial products all play into this. And that's how financial products are typically marketed to level two investors.

Voices [26:04]

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

Mostly Uncle Frank [26:15]

Level two investors also frequently fixate on income from investments, which causes them to construct very inefficient portfolios and pay more taxes than they ought to be paying, in addition to usually choosing investments that have lower total returns, such as this one, or have expensive fund fees as most closed-end funds do. If you want to get away from this kind of thinking and graduate to levels three or level four in investing, you need to recognize that there are no shiny objects or magic investing buttons that get presented to you or their financial advisors who can push them for you, causing you to pay them exorbitant fees. We do not live in a world like that anymore.

Voices [27:33]

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

Mostly Uncle Frank [27:37]

And so anybody that's telling you, oh, this is good because we get income out of it, is stupid. Anybody listening to that is kind of stupid. I'm not a smart man. But it's very attractive because people want to be thinking, oh, I get my retirement income paycheck. Aren't you Patrick Star?

Voices [28:00]

Yep. And this is your ID. Yep. I found this ID in this wallet. And if that's the case, this must be your wallet. That makes sense to me. Then take it.

Mostly Uncle Frank [28:14]

It's not my wallet. The first word after income is taxes. Drill this into your brain. The first word after income is taxes. The first word after income is taxes. T-A-X-E-S. Taxes. It's a bad thing. You don't want to pay it. That's why you don't want things shooting out of a bunch of income. Just how dumb are you? It varies. What you really want to have is not income in retirement. You want liquid resources. Liquid resources that you can sell whenever you want to sell them so that you can manage the TAXES taxes. Because that is really how you're going to maximize your retirement assets. Not paying taxes is the best way to maximize your retirement assets. And that requires you to choose assets that are not generating lots of T A X E S. Just because somebody says, oh, it feels good to have a retirement income paycheck.

Voices [29:17]

Don't you have to be stupid somewhere else.

Mostly Uncle Frank [29:19]

Not until four.

Voices [29:23]

Oh, that's gonna hurt. Do it again. I wasn't looking.

Mostly Uncle Frank [29:27]

And you should also never be fixated on funds, on particular funds. That's not good investing. Good portfolio construction starts with looking at asset classes. Stocks, bonds, alternatives, and then the individual classes of assets underneath that. Whether they be large cap blend, large cap growth, small cap value for stocks, international versions of those things, gold, managed futures, different kinds of bonds. That is what you're looking for. That is what you should be talking about. There should be no fund tickers involved in this discussion at all. You're not looking for funds to pick. You choose all of your asset classes. You want to make sure they work together in the way that is going to suit your retirement plans. And then only after that, the last thing you do is go look for funds that fit into those asset classes. And so if you're choosing a stock fund, there's no way you'd ever pick something like ADX. It's expensive and it has a history of underperformance. You want things that are relatively cheap and have good performance for their asset classes. So before you even got to picking funds, I would want to know what are all of the asset classes in your portfolio, how are they arranged? And then you want to tax locate those in specific accounts to minimize your taxes. And then you start looking at funds. Only then do you start looking at funds. You basically do need to turn off all common financial media, especially the TV versions of this. Because all they really talk about are specific assets and funds and which one is likely to go up or down in the near future. None of that is useful. In fact, it is counterproductive to be listening to that kind of garbage.

Voices [31:18]

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

Mostly Uncle Frank [31:24]

And as soon as you hear somebody babbling about generating retirement income, which is how many, if not most, financial advisors market to level two type investors.

Voices [31:34]

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

Mostly Uncle Frank [31:41]

Because it's it's really based on fear. I'm not going to have income. So we need to have things that generate income.

Voices [31:47]

Human sacrifice, dogs and cats living together, mass hysteria.

Mostly Uncle Frank [31:52]

Those are also voices you should not be listening to. Fat, drunk, and stupid is no way to go through lifestyle. And if you want to know how we build portfolios here, go back and listen to episode seven. I think that's the first time we talked about it. But then also I would go listen to my interview at Afford Anything, episode 618, that's Paula Pant's podcast. And I'll link to that on the show notes, and you can download a blueprint she created from that that really talks about how to construct one of these kind of portfolios. Again, starting with asset classes, not specific funds.

Voices [32:29]

That is the straight stuff, oh funk master.

Mostly Uncle Frank [32:33]

So you got plenty of time to figure this out between age 52 and 57. I would say it would only take you a few months of study to come up with a decent plan here.

Voices [32:44]

Unlike any schooling you've ever been through before.

Mostly Uncle Frank [32:48]

And then you should be well on your way. And so hopefully that helps. And thank you for your email.

Boosting Withdrawal Rates With Leverage

Voices [33:13]

Last off.

Mostly Uncle Frank [33:15]

Last off of an email from Roman.

Voices [33:21]

Oh, hail Caesar, Emperor of Rome, monarch of the Roman Empire, ruler of the world.

Mostly Uncle Frank [33:30]

And Roman rights.

Mostly Queen Mary [33:31]

Hi, Frank. I don't have a question this time around. Just a comment and finding that I thought your listenership would be interested in hearing. Following the long-term new asset class models that dropped on Testfolio this December and announced on Risk Parity Radio episode 473 under the Testfolio 5% withdrawal backtest comparison link, I started playing around with the existing model portfolios. Mainly, I wanted to see if it would be possible to achieve a 40-year perpetual withdrawal rate of at least 6% without relying on heavily leveraged funds like UPRO, TLT, UTSL, UDOW, etc., in order to get there. Sure enough, this can be done by making some changes to the Golden Butterfly and relying upon the mild leverage in G O V Z only as opposed to the more extreme 3X leverage in the previously mentioned funds. Basically, one would just have to swap out Z R O Z S IM in place of TLT SIM and swap out KMLM SIM in place of SHYSIM and XLU SIM before the inception date of KMLM to extend the back test. One can still preserve the same 20% allocations for each of the five funds, and voila, you get a 40-year perpetual withdrawal rate of 6.02% for this enhanced golden butterfly. This result can even be improved upon slightly by further tweaking some of the specific fund percentages, but the results are not super dramatic.

Mostly Uncle Frank [35:24]

Well, yes, Roman, there are many ways to skin a cat here. And if you do add a little leverage or pseudo-leverage to one of these portfolios, often you get the kinds of results that you see there. But there is a trade-off because you are adding risk to the portfolio when you do things like you describe.

Voices [35:55]

Freedom is unfree. You've got to pay a price, you've got to sacrifice for your liberty.

Mostly Uncle Frank [36:06]

The sample portfolios we have, the golden butterfly and golden ratio, are on the conservative end of these kind of portfolios. And they are really more geared towards somebody that just does not want to have huge drawdowns of 30 or 40%. And so that is the real difference here between a more conservative version of one of these portfolios and a more aggressive version of one of these portfolios. You can see this if you go look at a comparison. So I put your revised golden butterfly portfolio in with a golden butterfly portfolio and testfolio on a comparison, and I'll link to this in the show notes. And you can see they're both about the same efficiency in terms of things like sharp ratio. But your revised portfolio had a maximum drawdown of 30% over the period surveyed, which I think goes back to 1969 or something like that. Whereas the golden butterfly only had a maximum drawdown of 20%. And so correspondingly, the ULCER index for the golden butterfly was less than the portfolio you held. And that's the trade-off. That if you don't need a 6% withdrawal rate, maybe you only need a 5%, and you would prefer to have the most conservative portfolio that generated something like that, you could go with something like the golden butterfly and not worry about things. But if you wanted the option to spend more money or plan to spend more money and you're willing to take more risk, then you probably want to lower the percentage in the golden butterfly that's devoted to short-term bonds, because that is what makes that portfolio more conservative and have shorter drawdowns and shallower drawdowns and allocate that to other things, then you're going to have other kinds of portfolios with higher expected returns and higher expected withdrawal rates, but also deeper and longer expected drawdowns, especially on the deeper side. The length is probably going to be similar. And you can check out the withdrawal rates also at Test Folio. There's a tab there with all kinds of different permutations of them for different numbers of years and then different percentages of success rates and things like that. In Markowitz speak, the portfolio you've constructed is at a different point on the efficient frontier, essentially, where the returns are higher but the risk is higher. And the golden butterfly is at a point where the returns are lower and the risk is lower. But you can see their overall efficiency is very similar as their sharpened Sortino ratios are almost the same. But what this is is a good illustration of the difference between a level three type investor and a level four type investor. A level three type investor is going to come up with a specific formula, like a three fund portfolio, and adhere to that almost religiously. Because what they're really fixating on is just minimizing costs, and their solution for retirement has more to do with just not spending much money and continuing to accumulate.

Voices [39:06]

What's with you anyway? I can't help it. I'm a greedy slob. It's my hobby. Save me.

Mostly Uncle Frank [39:13]

A level four investor is going to be thinking of applying this in terms of principles. And so we'll be thinking about how much risk do I need to take to get the reward I think I need to have for these purposes? And what other goals in life is this going to achieve? And so would pick the golden butterfly or the portfolio that you've come up with based on the overall purpose of the portfolio in your overall life, which is going to include risk, returns, and then things like an ULCER index or maximum drawdowns. All of those are choices to consider, and then pick a portfolio that matches your individual preferences there, knowing that they're all likely to be of similar efficiency if you're talking about these risk parity style portfolios that we talk about here. But these are good things to be thinking about, and it's why I'm really happy whenever I see people bring a portfolio in, and it's different than something I would have picked, but it works well for their circumstances, and it is based on a good process and a good application of principles, particularly the Holy Grail principle.

Voices [40:20]

We have been charged by God with a sacred quest.

Mostly Uncle Frank [40:25]

And not just trying to adhere to some formula or some dogma. So there's some more food for thought for you. Hopefully that helps. And thank you for your email.

Voices [40:47]

Occupation. Gladiator. Did you kill last week? No. Did you try to kill last week? Yes. Now listen, this is your last week of unemployment insurance. Either you kill somebody next week or we're gonna have to change your status. You got it? Yeah. Sign. Next.

Life Reflections Plus Email And Reviews

Mostly Uncle Frank [41:12]

But now I see our signal is beginning to fade. I was reflecting today that today is my parents' 70th wedding anniversary. My father is ninety-seven and my mother is ninety-two. And we just moved them to assisted living this year. But according to my favorite AI bots, there's only about a one in one thousand chance that somebody would celebrate their seventieth wedding anniversary. How lucky is that? And would we prefer to be lucky in that way? Or to be lucky in markets or something else, even if we didn't live that long. I don't know what the answer to that is, but I do know that we should make the most of what we have in the time that we are having it. Whether those are marriages or other relationships, or any other experiences that would improve our well-being along the way. So while you are contemplating that you have any questions for me, please send them to Frank at RiskPartyReader.com. That email is Frank at RiskPartyr.com, or you can go to the website www.riskpartyreader.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 [42:48]

We find ourselves in a world of our own. We will have to be together.

Financial Advice Disclaimer

Mostly Queen Mary [43:35]

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.