“The Risk Parity Paradox” an Exercise in Simple Complexity? | Frank Vasquez | 124 - Catching Up to FI

Episode Transcript
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(00:01):
essentially people who are lateto fi in their fifties And sixties
that most of us can't afford to be.
Waiting until we're over saved.
We'll be 75 years old, but the way thatpersonal finance has evolved and just
about any famous guru you can think of.
All of those people tend to be greatat saving and accumulating, but they

(00:22):
don't make good role models actuallywhen it comes to spending and retiring
because they can't get over the humpof not still accumulating money.
think that we really should be approachingthis Particularly us in our fifties
and sixties as look, we did the work.
We did the hard saving.
Now it is time to enjoy that.

(00:43):
I was listening to one ofthese guru types and he says.
Well, my approach was toI wanted to be oversaved.
So I wanted to have twiceas much money as I needed.
So I decided to work till age 70.
So I would have twice asmuch money as I needed.
Now that may be great for him.
And it may be great for people whoreally love their jobs that much, but
I don't think that's good advice forpeople who really want to use their

(01:07):
money, enjoy their life startingsometime in their fifties or sixties.
In particular, that the advicethat is most commonly given
amounts to don't spend money.
That is the number one strategyof all of personal finance.
Guru land is don't spend money.
That's why they have allthese weird portfolios.

(01:28):
Some are 80, 20,
it's a foundational element,although it is not the end, put
it this way, it doesn't get youto where you need to go by itself.
And we can talk about that.
But when you hear risk parity,all you should think of, it's
a method of diversification.
That's all it is.
It's not magic.
It's not weird.
It's not from aliens have been talking.

(01:51):
people have been talking aboutdiversification since, if you go back
thousands of years to the Talmudicportfolio, which comes out of Jewish
teachings, it's one third gold, onethird real estate, one third of business.

(02:35):
Hello and welcome backto catching up to Fi.
It's been weeks since Jackie and Ihave been in front of the microphone.
We've seen each other twice inperson in Atlanta, and she's been
now to my home and seen her Anna.
So it's good to be back in thechair back on the mic and Jackie.
Happy New Year.
Happy New Year, Bill.
It was so great that our pathscrossed in person over the holidays.

(02:58):
So it was fun.
So we're not just podcast co hosts.
We are friends, got to see your lovelyfamily, your lovely wife, your sons.
So that was really cool.
So now we're back at work.
Yeah, yeah, it's back to the grind.
have a hard time doing this stuff.
And today we're going to havea really hard time because our
guest does not like to talk.
We're really going to have tobring him out of his shell because

(03:20):
ha.
He's being sarcastic for sure.
You recognize that laugh.
The laugh is a thumbprint, buthe has so much to say, but,
it's hard for him to get it out.
We'll bring it out.
We can do it.
We're good hosts.
We've been doing this for 115 episodesand our guest has been on before.
So he's a little practiced any rate.
Let's start the show.
Okay.

(03:40):
Our first thing is to give a podcast shoutout, and this will give you a hint as to
who our guest is, is to risk Parody radio.
And then, so Frank Vasquez isthe host and he is with us today.
That's www risk parody radio.com.
And his charity, which we wanna supportis the Father McKenna Center which
helps the homeless in Washington,dc And Frank is on the board so he

(04:02):
knows how your money gets spent.
Please go to father McKenna center.org andmake your donation in the new year today.
Make it a part of your givingplan, if you can for us and for
him and the people that he serves.
Alright.
So, our review of the week,Jackie, is from Vitlob, V I T L
O B, my favorite finance podcast.
Quote, great show.

(04:23):
late in the game or not, mostcomprehensive coverage of all topics
due to focusing on catching up.
When I get to Fi, I will donate boatloads.
It is making a huge difference.
So our call to action thisweek is we encourage all
listeners to donate a little.
While you Fi and boatloads when you Fi,go to the support tab on CatchingUpToFie.
com and buy us a coffee.

(04:44):
We drink boatloads ofmatcha tea, actually.
All right, Jackie, I'm going to turn itover to you and start this long winded
introduction to a long winded guest,
Yeah.
Well, if you haven't guessed alreadyour guest today is Frank Vasquez.
He is a mostly retired lawyer.
He has over 30 years of experiencein investing for his own accounts.

(05:05):
That's how he's gotten so good.
He holds degrees in economicsand engineering from California
Institute of Technology and a lawdegree from Georgetown University.
Wow.
He sounds impressive already, right?
Frank, he is extremely active in thefinancial independence community.
So I'm sure you have heard his name.
If you're in any of the groups he'salways answering all types of questions

(05:26):
and forums and Facebook groups.
He has appeared as a gueston many of your favorite.
podcast, including this one.
He's on episode 44 titledSpongebob and draw down strategies.
We'll include that in the show notes.
He runs a well attended workshopat the economy conference, which
is coming up in March bill.
You and I will be there, Frank, Ibelieve you'll be there as well.

(05:48):
And he hosts.
Ask Uncle Frank anything threadon Thursdays in the catching
up to Fi Facebook group.
So if you're not in there, comejoin us in the catching up to
Fi Facebook group community.
when he says, ask meanything, he really means it.
And he will answer your question.
His involvement in financial independencetopics and issues predates the

(06:11):
FI community as it's known today.
in the Dark Ages.
So Frank, that's just the firsthalf of our friend Frank Vasquez.
Bill what else?
When did you meet Frank?
Well, I met Frank at FinCon 2019in Washington, D. C., his hometown.
My wife and I had drinks withhim and found his wit and
wisdom quite entertaining.
I think he actually made a passat my wife, but I'm not sure.

(06:33):
His laugh is an unmistakable fingerprintand it can be heard far afield.
He is the founder and host of Risk ParodyRadio, a laboratory or dive bar devoted
to asset allocations for the DIY investor.
Drawdown portfolios, AMA iswith Frank and his famous rants.
One of Frank's guiding meta principlesthat you will hear on this show is a

(06:54):
foolish consistency is the hop goblinof little minds adored by little
statesmen and philosophers and divines.
That's Ralph Waldo Emerson.
Another, and it shows his diverseinterest, is absorb what is useful,
discard what is useless, and addwhat is specifically your own.
That is, Bruce Lee.
Most importantly, Frankloves waffles and good wine.

(07:15):
And so do I. Now, Frank will be able tosay that he's been a guest on the Catching
Up to FI podcast twice, and there arevery few that can say that in this world.
We are gluttons forpunishment around here.
We had to give him a chance to rebutanother giant in the FI space, Big Ern,
aka Karsten Jeske who dissed risk parityin the 5 percent rule on episode 106.

(07:35):
And threw down the gauntlet next time.
We'll have to have both of you on for apolite SmackDown, MMA style, an erudite
discussion on why the world is actuallyflat and the real value of small cap
value, international equities, gold,Bitcoin, long term treasuries, preferred
shares, and butter in retirementdrawdown portfolio construction.
But first welcome back, Frank,to the catching up to Fi podcast.

(07:59):
Ooh,
Thank you, that was quite an introduction.
I don't know if I can, I'lljust, I'll just step out now.
you're like, is that me?
That is you, my friend.
there is so much more to you,and I do count you as a friend.
Heck, we're actually, daring totravel with you and Mary, your,

(08:19):
announcer on your podcast, spouse andpartner, to South Africa this year.
This is going to be interesting.
It'll be epic
in more ways than one.
I'm sure we're
Yeah, we're trying to spend money on theway to Fi and that's one of your things
in the Fi community that we'll talk about.
So yeah, I mean, you are famous foryour rants, but before we get to that,

(08:41):
I understand some of your podcastlisteners have likened themselves to
people who are fans of the Grateful Dead.
Why is that?
I'm afraid missing the reference.
Oh, it's the licorice one.
yeah,
I think they asked Ithink it was Jerry Garcia.
They interviewed him he said, what aboutpeople that like the Grateful Dead?
He said.
Well, it's like licorice.

(09:02):
If you like licorice, you'rereally, really like licorice.
And if you don't like licorice, youdon't want to go anywhere near licorice.
And So that does describe podcastI have either, people like it a
lot and they stay or they reallydon't and they leave and that.
Whichever way you like it is finebecause my podcast is a hobby.
It's not a commercial endeavor.

(09:24):
And so you just get a lot ofmy humor and musings and other
things going on in there.
It's more like, as I say, ifI was running a dive bar in my
basement, it'd be kind of like that.
because I have a lot of kindof regulars that will email in
and ask about various things.
And they even have like little.
nicknames and things.
We have Alexi, who's also a doctor.

(09:46):
We call him the dude
Frank, I think
that's why people likeyour advice because.
You're not in it for profit.
You're not trying to sell them anything.
Now, sometimes you come across,you hurt my feelings a few
times before I got to know you.
Cause you go right in, but I thinkthat's why people are kind of drawn to
you and the advice that you give becauseyou're not trying to sell anything.

(10:08):
You're not trying to talk theminto anything else except to give
them your honest, well thought out.
Based on all the experience that you have.
So we appreciate that.
We appreciate you hangingout in our Facebook group and
giving good, honest feedback.
he can be gentle.
I've seen him be gentle.
He has a heart, absolutely.
depends on who you are.
It depends on who you are, becauseif you are a successful person

(10:31):
who has everything going for them.
I'm going to be really hard on you.
If you're struggling, if you're havinga hard time, if you have things you need
to overcome, I'm going to be nice to you.
I think it's an inverse proportionto how well off you are, because if
you're doing well, I thinkyou can probably do better.
And if you're not doing well,well, we need to lift you up.
a good example of that is yourfather, McKenna, how you support that.

(10:55):
And, by the way, can you tell us alittle bit about what father McKenna,
the nonprofit organization does?
yeah, the father McKenna centeris it serves homeless and
hungry people in Washington, DC.
So we run a soup kitchen and havesome related programs, a food
pantry and some other things.
It's actually run out of the basementof an old church That is attached to

(11:15):
a high school, Gonzaga high school.
And it's right there on NorthCapitol street, North of the Capitol.
And so we actually have about a thousandvolunteers that work and most of them
are students at the school or otherstudents from other schools who come
to volunteer and serving the peoplehelping with the food and other things.
And we have about 6 staff,so it's a small charity.

(11:38):
Our budget is about 1.
5 million dollars a year thatwe pretty much need to raise.
And so.
part of what I'm trying to do withmy integrated life in retirement
is to take all the things thatI do And, bring them together.
so part of what I like to do onthe podcast is promote the charity.
And if you give to the charity, you getto go to the front of my email line.

(12:00):
That's about all I have reallyto offer in terms of something
beautiful, Frank.
yeah, no, I do really want to thankall the people that have donated to
the center because we've really raisednow tens of thousands of dollars
and it continues to pour in everyweek, every month somebody's giving.
And it's really,gratifying and it, really.

(12:20):
makes me feel good.
And it's really helping people becausethis, money is so efficiently used.
That's what I like to tell my listenerswho care about financial efficiency.
We have very low overhead.
We don't pay any rent becausespace is provided by the school.
And so almost all the dollars you giveare going straight into food and services.

(12:40):
so you're getting a lot of bang foryour charitable buck, if you will.
there is a nice website with a lotof more information about the center,
the father McKenna center.org.
You can also donate there.
We accept, stock shares.
If you're thinking about yourqds or , your alternative ways of
giving that are tax efficient foryou, we can take all of that in.

(13:02):
And I would appreciate itif you would consider us
I've donated and I challengeour audience to do so.
We have 6, 000 new listeners everyweek, and if we can just get 100
or up to 1, 000 to do so, thinkof the impact you'll make here.
And I believe in small impactcharities like this one, but
you're not always so serious.
You're known for your humor, and I wantto know, what is it with SpongeBob,

(13:26):
Talladega Nights, and the endlessquips, clips, quotes, witticisms, and
seemingly useless trivia that inhabitsthe dark corners of your bottomless mind?
Did no one play with you as a small child?
don't know.
most people have, guess when their mindis at rest and they're not thinking about
anything, they might have an internalcritic or something going on in there.

(13:48):
I have, replays of jokes and songsand commercials for my child?
A lot of this stuff.
This is what, for instance, the Spongeboband the Talaga day and night stuff are
things that we enjoyed with my childrenand the original purpose of my podcast,
which was like a COVID project wassimply to lay down some information

(14:10):
to preserve it for my children as theygo forward with their investing lives.
But what I learned is the wayto get them to listen to it.
And they're all in their twenties isto put in these kinds of clips and
references to SpongeBob and other things.
And so since they still are themain audience or the one I care about
the most I will continue to do that.

(14:31):
And, it's one of those things that people.
it's the grateful dead thing.
Other people really like it or theyreally hate it, but it is what it is.
So
Well, it can seem complex, but ifyou take it down to its fundamental
parts, your show and the informationyou provide is actually very
simple, as we'll talk about today.
But again, before we dothat, you love to rant.

(14:52):
You are famous for your rants, andthe one that probably applies to
this show is the one we would like tocall the over saved and under spent.
What do you mean by that?
I think this really appliesalso because of your audience is
essentially people who are lateto fi in their fifties And sixties
that most of us can't afford to be.

(15:12):
Waiting until we're over saved.
We'll be 75 years old, but the way thatpersonal finance has evolved and just
about any famous guru you can think of.
All of those people tend to be greatat saving and accumulating, but they
don't make good role models actuallywhen it comes to spending and retiring
because they can't get over the humpof not still accumulating money.

(15:35):
think that we really should be approachingthis Particularly us in our fifties
and sixties as look, we did the work.
We did the hard saving.
Now it is time to enjoy that.
So what we should be focused on andwhat I'm focused on in my pocket is,
is how can we spend the most moneyout of our accumulated assets, not

(15:56):
how can we become the most over saved?
I was listening and I won't mention hisname, but just last month, I was listening
to one of these guru types and he says.
Well, my approach was toI wanted to be oversaved.
So I wanted to have twiceas much money as I needed.
So I decided to work till age 70.
So I would have twice asmuch money as I needed.
Now that may be great for him.

(16:17):
And it may be great for people whoreally love their jobs that much, but
I don't think that's good advice forpeople who really want to use their
money, enjoy their life startingsometime in their fifties or sixties.
In particular, that the advicethat is most commonly given
amounts to don't spend money.
That is the number one strategyof all of personal finance.

(16:41):
Guru land is don't spend money.
That's why they have allthese weird portfolios.
Some are 80, 20, some are 20,80, some have buckets of cash or
houses or ladders or other, allsorts of other things going on.
If you strip it all off, theirreal strategy is don't spend money.
And that's fine.
If you want to accumulate, that's fine.
If you want to die with the most money,if that's your goal, that's fine.

(17:04):
I don't think that's a good goal.
I don't think most people really havethat goal when they think about it.
And so if you don't have that goal, and ifyour goal is, I want to spend more money
now while I can still enjoy it, then thatis, the kind of person that gravitates
towards my podcast and what I have to say,

(17:25):
And we argue about, three tosix percent withdrawal rates.
And as you've said, and I've heard youoften repeat, at three percent, you
can pretty much do whatever you wantwith your portfolio and you're safe.
And then we have BillBengen, four percent.
We have the modern BillBengen of five percent.
We have Frank
It's the same guy.
That, that's another thing I like torant about There's a number of people in

(17:47):
personal finance land who love 1990s BillBengen because he says 4%, but you ask him
about what today Bill Bengen it says 5%.
It's like, Oh no, he's too old.
He doesn't know what he'stalking about anymore.
he's been on the show and his book'scoming out this fall as we're all excited
about, and he'll outline his new research,but let's turn the clock back for a minute

(18:08):
because risk parody has been around fordecades, if not centuries and centuries.
I think for Our folks to understand whatit is, and we'll define it along the way.
Where did it start take us throughthe timeline of history as it's
evolution, Frank, and you've done thison your show and some foundational
episodes, 1, 3, I think 13.

(18:29):
And we want our audience to listento those, but let's, give it a
high level overview first, right?
Jackie.
Yeah.
Cause risk parity, that's probablysomething a lot of people hadn't heard of.
I really hadn't thought a lot aboutit in my portfolio construction.
I keep it fairly simple, but yeah,kind of break that down for us a
little bit, risk parity, cause that'ssort of your theme when it comes to.

(18:50):
Portfolio construction, right?
it's a foundational element,although it is not the end, put
it this way, it doesn't get youto where you need to go by itself.
And we can talk about that.
But when you hear risk parity,all you should think of, it's
a method of diversification.
That's all it is.
It's not magic.
It's not weird.
It's not from aliens have been talking.

(19:13):
people have been talking aboutdiversification since, if you go back
thousands of years to the Talmudicportfolio, which comes out of Jewish
teachings, it's one third gold, onethird real estate, one third of business.
as you go forward in time though,where this really starts to form in
modern parlance, if you will, is.

(19:34):
After Harry Markowitz came up withmodern portfolio theory back in
the 1950s and wrote the originalpapers about diversification.
First, just talking about a diversifiedportfolio amongst stocks, but then
applying that to multiple assetclasses that morphed over time.
People recognized after playingwith it for a couple of decades, you

(19:56):
ended up with the 60, 40 portfolio.
That is a. An idea that comesout of the 1970s and 1980s.
Now as more people became involved inreally trying to diversify portfolios,
the people that are really workingon the forefront of that are people
that ran hedge funds and peoplewho were working in particular for

(20:17):
large pensions and institutions.
who had a lot of money and theywere looking for different kinds
of strategies to employ forpart of or some of their assets.
And this goes on today.
In fact, I live inFairfax County, Virginia.
It has a million people in it.
Their police and fire are pension plansare managed on a risk parity basis.

(20:37):
So that is where the original ideas camefrom, because only large institutions.
Like Yale or, or a pension plan orBridgewater Ray Dalio is the name that
is associated most with risk parity.
Only they could really implement thesethings when you're talking about what
was going on in the 1990s, like 30 yearsago, because we didn't have all of the

(21:01):
funds and ETFs that are easily availableand that are cheap enough to use.
Now, so that name, that, tag risk parodycame into being about 20 some years ago.
And was essentially used to describewhat Bridgewater, hedge fund was
doing and what they were marketingto the pensions they serve in the

(21:21):
institutions that they worked with.
After that, a number of paperswere written on that topic.
It is now part of the, it'snot part of the CFP curriculum.
It's part of the CFA curriculum.
And there's a whole chapterin the CFA manual about that.
Just risk parity and what it is.
So it is part of the whole developmentof ways to diversify a portfolio.

(21:43):
And why do you want todiversify a portfolio?
It goes to what Markowitz andothers came up with, which is
called the efficient frontier.
It's basically like, if you have a set ofassets that you want to use for portfolio
to invest in assets, A, B, C, D, andE, there's a way to combine them to get
the best risk reward characteristics,the balance between risk and reward.

(22:05):
And that is really what diversificationIs all about is how can we combine assets?
So we get the mostreward for unit of risk.
So that gives you kind athumbnail sketch of, risk parity.
if you want to read more aboutit, you go back to those first
episodes, one, three, five, seven,and nine and go to the show notes.

(22:25):
There's all kinds of articles and things.
Written describing that in moredetail, the way I use that in what
I'm talking about in the podcast is.
not in the academic or classicsense, which was to actually look
at the volatility characteristicsof each asset and balance them
out in that way, which is a verytechnical or academic way of doing it.

(22:47):
What I think was important and importantfor retirees is let's focus on safe
withdrawal rate as the metric, thething we are trying to maximize.
And so that simply requires makinga few adjustments in what would be a
classic risk parity style portfolioand creating something that has

(23:08):
a higher safe withdrawal rate.
It's essentially on adifferent part of the.
Efficient frontier curve that you'retaking a little bit more risk because you
can get a, higher safe withdrawal rateout of the mix that you're, getting it.
think I need to let you ask a question.
Okay.

(24:37):
what was confusing about that?
Was that absolutely
No, I was about to sayso for clarification.
So this risk parity approach isprimarily used for people that are
managing money and portfolios formaybe large Organizations like pension
funds, things like that, hedge funds.

(24:58):
And it is, risk parity essentiallyis levels of diversification.
Now you mentioned so Ray Dalio, he'sthe guy that sort of, would you say
he made this risk parity famous?
Yeah.
, that he's the name that is mostcommonly associated with it.
And he has.
Written about it.
He was interviewed in Tony Robbinsbook, money, master the game.

(25:18):
And that is what really popularizedRay Dalio and risk parody.
Yeah, and I've seen him on CNBC a lot.
I
yeah, he's, he's, he's, retirednow and he's just out there
commentating on all kinds of things.
Things financial and thingsthat are not financial.
But this was, kind ofhis baby, if you will.
that he really developed inthe 1990s where it came from.

(25:40):
And back then people were working withthis new invention called a spreadsheet.
Which also, tells you why we can do thingslike this now is do it yourself investors
that were not possible 30 years ago.
yeah, that's the connectionI was going to make Frank.
So you're saying back in the day,it was mainly an institutional

(26:01):
thing where only people that weremanaging large portfolios did it.
Today's technology.
Allows individual investors to be ableto model this out and potentially do it
for themselves in a fairly simple way.
that's right.
Because back in that time,there were no index funds.
There were no ETFs.

(26:22):
I think the first ETF wasinvented in about 1993.
I think it was SPY.
Right.
And so people that were trying to dothis, they were buying individual assets.
They were buying futures contracts.
They were engaged in, all kinds ofcomplex partnerships and individual
bonds and all sorts of things like that.
don't have to deal with individualassets like that anymore.

(26:44):
there are ETFs for, everythingnow, literally everything, even
a lot of things you don't want.
but especially since 2018 or 2019, theSEC loosened up the rules on what you
could put in an E. T. F. and so thathas led to this explosion and why ETFs
are gradually taking over the landscapefrom mutual funds because they're

(27:05):
more efficient and more flexible.
And so the way.
that the world is going in particularin personal finance land is we are
moving towards ETFs and away from mutualfunds, even though they can have the
same things in them for the most part.
It's really the ETF form that it's allowedus to invest in specific asset classes.
And I'll give you a good example.

(27:26):
if you go 20 years ago and you wantedto get a Vanguard bond fund, pretty much
had like a couple of them, a total bondfund, and maybe a corporate one, and
maybe some general treasury bond fund.
And that was about it.
These days.
Vanguard has like 20 ETFs.
And So.
for instance, if you wantshort term treasury bonds,

(27:47):
Vanguard has an ETF for that.
If you want intermediate treasurybonds, Vanguard has an ETF for that.
You want long term treasury bonds,Vanguard has an ETF for that.
Vanguard has an ETF for all kindsof different corporate bonds.
Vanguard has ETFs for very short termbonds and Vanguard is only One provider.
So you can literally dial in andpick a set of asset classes now

(28:10):
that you couldn't do 20 yearsago and find inexpensive funds.
To fulfill those roles.
And so instead of having two orthree funds that try to cover
the whole universe, you can havefive or six funds that are more
specifically invested in what youreally want and then combine those.
so that is, where we're really movingtowards away from kind of more one

(28:34):
size fits all solutions that you had.
20 years ago, that's the first sortof round of index funds that really
became popular in the first decadeof this century, has grown and
morphed into all of these options.
One of the things that our audience isgoing to want to know, because their
portfolio is maybe smaller as latestarters, is there a price of entry?

(28:55):
Is there a, optimal minimum portfolio inorder to enter this risk parity strategy
before you should even think about it?
this is really for somebody in theirretirement or decumulation phase.
mean, you can use these portfoliosand I know people that use these
kind of portfolios to accumulatein, but they're more conservative.
They're not designedfor accumulation itself.
If you're accumulating.

(29:16):
Follow Paul Merriman's recommendationsand go 100 percent in stocks and have a
couple of funds and you'll be fine there.
So, but in terms of, isthere a minimum amount?
No, not anymore.
that was one of the thingsthat actually allowed me to
set, I have sample portfolios.
That we talk about in thepodcast and put on the website.
Those are real live portfolios.

(29:38):
There are only 10, 000 each, but sincethey are at Fidelity, who allows you
to trade with no fees and in fractionalshare amounts, so you can buy a dollar's
worth of something that is one thingthat has occurred in the past few years.
barriers to entry have gone to zero,that you can create any of these kind
of portfolios at literally no cost.

(29:59):
Now don't think you'd want tocreate one with 100, but you could.
And it does allow, I know a lot of mylisteners, They like to like, well,
I'll just go create another littleaccount and put this thing in there
and run it and see what it does.
you literally can experiment withthings , and do things that you couldn't
have possibly done before because ofthe, cost would have been prohibitive

(30:20):
even before 2020, because that's when wewent to no fee trading in most places.
so Yeah.
there isn't any minimum anymore.
Although if you're trying toaccumulate, don't need, something
with, five or six funds in it, you'dhave something with one or two funds
in it, or one to four, I would say isprobably more than enough for that.
So, with these issues, two of theconcepts that we need to understand

(30:44):
the concept of correlation.
This is really important in risk parity.
Can you take us through whatthat is and how that works?
For the parody approach.
Sure.
Correlation is a measurementof diversification.
This is important for people tounderstand that diversification
does not mean different.
It doesn't mean different names.

(31:04):
You could have two thingsthat are different.
They have different names.
They're different investments.
But they're not diversified.
And how do you know whetherthey're diversified or not?
You look at what's called thecorrelation number, which is based
on how they have traded in the samemarkets at the same time in the past.
And so the measurement of correlationgoes from negative one to positive one.

(31:28):
If things are positively correlated,they're close to plus one.
That means they move together all thetime and may have almost the same returns.
So if you take something like a totalstock market fund and an S and P 500
fund, those are something like 99.
7 percent correlated and they'regoing to be moving in the same
direction and probably in almostthe same magnitude all the time.

(31:51):
and that is a very basic idea that.
I think amateurs need to learn first,that just because you have different
funds does that is not diversification.
You actually have to look at how behave.
So what you are looking atwhen you're trying to diversify
a portfolio are things with.
lower correlations.
And if you have two assets with zerocorrelations, that means they don't

(32:13):
have any relationship to each other.
They move in differentdirections all the time.
One could be up and the other one down.
If you have two things that havea negative correlation, they tend
to move in opposite directions.
the time.
Now, another thing that is confusinghere, Is that correlations change?
don't change like randomly,but they do change over time.

(32:35):
And they change based on theeconomic overall economic
environment we're living in.
So there are typically the waythat an economy is divided up.
And looking at this, you think of, arewe in an economy with higher growth or
growth that is declining and is inflationgoing up or is inflation going down?

(32:59):
If you have those two things and youuse them like, two axes, basically,
have four quadrants.
So we have, one quadrant where growth isincreasing and inflation is increasing.
You have one quadrant where growthis decreasing and inflation is
increasing opposite of that,or they can both be decreasing.
In which case you're in a recession.
And so each of those categorizationdefines a macro economic environment.

(33:22):
And then if you look at each economicenvironment and take an asset, say
large cap growth fund or a tech fund,can look at how that has performed
in all those different environmentsand get an idea of how it performs,
then you can take another asset.
and compare it.
And you'll find that in some of thoseeconomic environments, things are
positively correlated in other ones.

(33:42):
They're negatively correlated.
And that particularly comes into playWhen you're talking about treasury
bonds, because treasury bonds willbe negatively correlated with most
stock market assets in recessionaryenvironments, but they can be positively
correlated in inflationary environment.
I think that confuses people becausethere is the confusion there is

(34:04):
sometimes people have the idea thateither correlations are random.
or they are changing in some strangeparadigm way that for, the next five
years, they're going to be correlatedto they're not going to be correlated.
And that Frequently in most recent times,because you had the year 2022 when bonds

(34:26):
and stocks showed positive correlation.
Some people have interpretedthat as, a sea change.
And now there's the negativecorrelation is gone and we're
never going to be seeing it again.
just like, wait till the next recession.
In fact, wait till the last coupleof years, last year, stocks and bonds
were negatively correlated again.
but the importance of that overlong periods of time is you can

(34:48):
look at a general idea of whatthe correlations have been.
And then you use that to constructa portfolio with, because you
want assets that have positivereturns, but low correlations.
frequently are not negatively correlated.
Frequently, you're just talkingabout lower correlations.
And so Even if bonds are typicallyzero to negative with stocks,

(35:09):
sometimes they're positive.
are certain goal.
Yeah.
Gold has a zero correlationwith both stocks and bonds.
And that is what makes it valuable ina portfolio because it has that zero
correlation with both stocks and bonds.
If you put it into a portfolio,it will tend to Reduce the overall
volatility or risk profile, theportfolio greatly without reducing

(35:34):
the overall returns very greatly.
But there is an optimal amountof gold to put in a portfolio
for a good, safe withdrawal rate.
And it happens to be between 10 and 15%.
the person who ran thatstudy is named Carsten Jeska.
It's safe withdrawal rate series.
Number 34,
That's aka Big Earn.

(35:57):
Yeah.
He may not agree with the conceptin toto of risk sharing portfolios,
ran it back a hundred years and said,well, we had 10 to 15 percent in gold
of these stock and bond portfolios.
It tends to increase the safewithdrawal rate of usually about.
Half a percent.
I don't think he holds goldin his portfolio, does he?
No,
but he does what does he do?

(36:17):
He does options.
That's one of his hobbies.
in
a side hustle.
That's the side hustle.
I would, put that active trading.
I would call a side hustle
Okay.
So that's, was going tobe my question to you.
So it sounds like you're likesome of these correlations,
it depends on the inflationaryenvironment and things like that.
So it sounds like the risk parity,managing a portfolio like that

(36:38):
would have to be somewhat active.
actually it doesn't have to be,
No.
Okay.
Because I'm thinking if we're in aninflationary environment and then we're
not, then you might have to do something.
but it's better just to,think of this long term,
Okay.
longer terms that.
yes, you can look atthose kinds of things.
And that is what theprofessionals try to do.

(37:01):
They look at macroeconomic environmentsand say, Oh, well, it's a good
kind of environment for this asset.
So we're going to tilt towards thatone until the weight towards that one.
You don't have to do that though,as a do it yourself investor.
And in fact, I recommendyou don't do that.
what I would recommend is you do.
What most people recommend, whichis called naive diversification
in naive diversification.

(37:22):
You come up with a set percentageallocations of what you want.
60 40.
That's a naive diversification.
60 percent of this 40 percent of that.
You have five things you can have.
They all could be twenties youcan mix them in some other way.
But whatever you come up with, youwant to stick with that and then
you rebalance that periodically.
In accordance with some rules, eitheryou can rebalance it once a year is

(37:45):
a common rule, or you can rebalanceit if it goes so far out of whack,
just called rebalancing on bands.
But you come up with a staticrule So, that, no, you're not
thinking about this stuff.
you said it and you mostlyforget it, but you look at it and
say, oh, it triggered the rule.
My investor policy statement saysI rebalance now poke button, I'm

(38:09):
So,
well, that's my new word naivediversification which is what I prefer.
Okay.
So I'm glad you clarified that for
us because it was sort of sounding like, I
know what you mean.
So like
can,
make this complicated.
that's what they pay the big bucks for.
If you would.
That's what all thesepeople that, sell services.
And , I watched these guys on theirpodcasts or videos and things like that.

(38:31):
they're selling a service like that.
And it's, interesting to watch.
I don't think anybody needs tobe doing anything like that.
I think that just coming up with nice.
Set allocation that has worked verywell in the past and is likely to
work very well in the future is whatyou want to do and then rebalance it.
So you have some principlesactually that we should back up to

(38:53):
or backtrack to that help people.
You have three fundamental principlesthat you recommend that people
apply in that order actually to sortof put together their portfolio.
And so what are your cardinalprinciples of investing portfolio
construction for our audience?
yeah, the three basic principles,and I think I discussed these
in detail in episode seven

(39:15):
are what I call the Holy Grail principle,which is It's just diversification.
And the reason we call it the Holygrail principle is Ray Dalio said the
Holy grail of investing is to find, hesaid, 10 to 15 uncorrelated assets and
constructive portfolio out of them.
I don't know if you can find 10assets, but if you can find how

(39:37):
about five and so that the Holy grailprinciple is We need to find assets
that are truly diversified over andconstruct a portfolio out of those.
The next principle is themacro allocation principle.
And this one actually comesfrom most neglected chapters
of common sense investing.
Jack Bogle's famous bookare chapters 18 and 19.

(39:59):
And this comes from that, what manystudies have shown going back to the
1980s is that if you know, some basicparameters a portfolio, that it has 60
percent stocks or 80 percent stocks inparticular, focusing on how much are the
equities, all of those portfolios arelikely to perform similarly over time.
So that is one of the main thingsto think about when you're thinking

(40:23):
about constructing a portfolio ishow aggressive do I want this to be?
This also plays into what Bill Bengenhas said and others have said, and I
don't know whether it was on your podcastor another one of those two, he said
this since the 1990s that kind of thesweet spot terms of a macro allocation
for stocks in a portfolio that isgoing to have a high safe withdrawal

(40:45):
rate is somewhere between 40 and 70%.
He said it is a macro.
by the
Yes, that is a macro allocation principle.
so purpose of the macroallocation principle is just
to get you in a ballpark.
It's sort of like recognizing thatI don't care which combination
of stock funds you have.
If your portfolio is 70 percent stocks,it's going to perform over time.

(41:07):
A lot like another one,that 70 percent stocks.
And so just monkeying around with a wholebunch of different funds and adding more
funds and when you have the same macroallocation probably isn't going to have
much of an effect over time that onereason you, you don't need 10 stock funds.
You can have 2 or 3.
and be fine.
So that's the, second principle.
And the third principleis a simplicity principle.

(41:30):
And that is simply idea thatlet's do naive diversification.
Let's not be trying to market timeand looking at macro allocation
factors and, tilting this way.
or tilting that way ordoing things like that.
Let's use low cost funds.
ETFs these days.
Index funds and, in ETF form and let's,create a portfolio that hopefully has

(41:54):
certainly less than 10 assets in it.
5 is probably more than enough.
And that's including a cash allocation.
always like to referto Einstein with this.
You want something to be as simpleas possible, but no simpler.
So I think the mistake I see,zeitgeist in personal finance land

(42:15):
is simplicity over everything else.
And I think that's wrong thatyou shouldn't be worshiping
some God of simplicity.
And.
Just having one fund does not makeyour portfolio better than one with
four funds in it, just because ithas one fund instead of four funds.
That the real question is how simpledoes it need to be in order to fulfill
the purpose that we are serving withthis portfolio, which in this case is

(42:38):
to have a higher safe withdrawal rate.
You really can't do thatwith two or three funds.
You need, Between fourand six, probably minimum.
Very interesting.
So you're putting to rest that risk parityshould probably replace a little bit,
JL Collins, Bogleheads, Bill Bengan'sfirst era, the golden fleece of the
five, two to three point portfolio thatare all accumulation portfolios and
add a couple of funds and mix them upa little bit different in the batter of

(43:02):
your cake in order to have a drawdownportfolio that has less volatility
and a higher safe withdrawal rate, is
Yeah.
Ultimately.
Yeah.
That you always have thatbalance between volatility and
returns essentially is what.
Feeds into the safe withdrawal rate.
So you're adding a few thingsthat hopefully will not reduce
the returns too much, but willgreatly reduce the volatility.

(43:27):
and that's what gives you a betterportfolio for drawing down on.
So another good way to illustrateor think about this is thinking
about the magnitude of drawdownsand then the length of drawdowns.
For a particular portfolio historically.
So if you have a portfolio thatis a hundred percent stocks or

(43:47):
even a 60 40 portfolio, somethingthat's just a stock and bond thing,
those have typically had drawdownsthat go up to up to 13 years long.
So you can be underwater for up to13 years with a portfolio like that.
And that's what youshould be preparing for.
Because that's the worst case scenario.
That's where the 4percent rule comes from.
Knowing you have this 13 year drawdown,the kinds of portfolios that we work

(44:10):
with have drawdowns of between threeto four years, max not average max.
I think of one of the big mistakesI see going on right now in personal
finance land is if you read somethingand somebody says, I have this strategy.
This bucket strategy, whereverit is, it's designed to survive.
We know that stock market has anaverage drawdown of three years.

(44:32):
So I'll just have this three years ofstuff and that'll solve my problem.
No, it won't.
That's not your problem.
Your problem is a 13 year drawdown.
That's the problem you're trying to solve.
How are you going to take yourportfolio and create something that
does not have a 13 year drawdown.
and if you take.
A few more assets thatare well diversified.
You can create portfolios that havemax drawdowns of three to four years.

(44:56):
That's an important point.
It really is.
Jackie, what do you think?
Yeah, so I have a question for Frank.
Okay.
So I love the idea that you'remaking us to think about uncorrelated
things a little bit more aboutdiversification in a different way.
So as you're thinking about thatportfolio, we should also consider.
Assets like, let's say, if youhappen to have a small pension that's

(45:18):
coming in, that's very differentthan stocks or social security.
So those are pieces that wewould want to think in terms of,
I guess, our assets as a whole.
And, technically those aren't assets,that's income, but still it could make
a difference in what the portfolio lookslike because we've got some of this fixed
income that's coming in no matter what.
it could, but it doesn't have to.

(45:40):
think you really want to be model this inthe simplest and most straightforward way,
the way to do it is to simply take yourannual expenses, subtract off whatever
that income is, whether it's social
security, you get a smallernumber of net expenses.
that then your investedportfolio needs to cover.
And then just think about that separately.

(46:00):
This needs to cover that portfolio this
portfolio needs to cover that You coulddo this in other ways that I see people is
like, well, this one's kind of like bonds.
So therefore I'm goingto put this other thing.
But it doesn't really work.
To do it.
that way.
it makes things much more complicated.
And one of the reasons it makes it So muchmore complicated, particularly if you have

(46:20):
something like real estate or some kind ofannuity or pension or something like that,
you can't rebalance that thing with your
Right.
That is the problem.
Right.
So the
it's
way to do it is just to deduct it
Yeah.
Yeah.
It's not, like a bond because youcan't buy more of it or sell a piece of
I think rental real estate easier tothink about because it's a fixed asset.

(46:44):
not going to sell apiece of the, shingles.
But any pension is kind of like that too.
You can't, go in there and say,well, I'll just take a piece of
this pension sell it for extra moneythis year, not allowed to do that.
And since you cannot sell or buy more ofthis thing, I think better way to model
it for planning purposes is simply tosubtract it off of the gross expenses.

(47:10):
then you end up with a netexpenses that need to be covered
by an invested portfolio.
then you can just, do that.
And social which is a superpower of thelate starter audience is one of those
right.
well.
Don't forget about it.
I
Yeah.
So let's say for instance, if you, I'mgood with the examples helped me a lot.
So let's say if you need10, 000 a month, right?

(47:32):
I don't need that, butsome other big guys might.
So 10, 000, if you were getting 5,000 between a small pension and social
security, Then as far as this risk parityportfolio, you need to set it up to
where you can pull out 5, 000, right?
Because you've already got.
Okay.
All right.
and that's true of, I mean,it's true of any portfolio.
I mean, I would, use thismodeling with any kind of

(47:53):
retirement portfolio talking about at all.
Because I think it's the simplestand cleanest way of, looking at it.
that,
mean, one of the things people needto think about, and we did an episode
on this back, oh, in episode 41 withDavid Stein, the host of the Money for
the Rest of Us podcast, is how do youanalyze an investment, one of these
five to six funds, or real estate, orwhatever, that goes into your portfolio,

(48:18):
and without going through it adnauseum because we spent an hour on it.
I want to briefly reiterate that and getany commentary that you might have on it.
The first thing you need to askyourself is what is it, right?
correct.
And so
is it exactly you're looking at?
The second thing you need tolook at is, is it an investment,
a speculation or a gamble?
And how would you definethose three frames?

(48:38):
well, I would use DavidStein's definitions because
I think they're pretty good.
investment is typically somethingthat is producing an income stream.
So it is like a stock represents acompany that's producing a profit
or it's a bond that is producing anincome stream, or it could be something
like a real estate investment.
a speculation is something thathas a positive expectation.

(49:01):
You think it's going to beworth more money in the future.
But it's not, creating an income stream.
the technical difference between the twoof them is you can use what's called a
discount and cashflow analysis to analyzean investment because it has a cashflow.
Something without a cashflow that couldbe worth more money in the future, or you
think is likely to be worth more moneyin the future, that is a speculation.

(49:23):
So
a couple of examples of what
Gold is speculation.
Bitcoin is a speculation.
and interesting.
A lot of this, things that arespeculations are really, what you're
really counting on is that, that,you know, that are the currency we
work in is deteriorating over time.
It's inflating itself away over time.
that's a feature of our, dollar.
It's not a bug.

(49:43):
It's a feature.
And so anything that is goingto hold value is going to Go.
up in value.
In terms of dollars over time.
So something that is going to be rare,like gold or artwork or a commodity
or Bitcoin anything of those naturethat you have a, confidence that
it has a positive expectation itwill be worth more money over time.

(50:06):
That is what you would calla speculation and that is
distinguishing it between a gamble.
A gamble has a negative expectation.
A gamble is what you do at the casino.
You think you are actually likelyto lose money on this thing if you
were to keep in it, gambling in it.
So would you consider?
Penny stocks,
penny
stocks.
are like that because in theory, apenny stock does represent a company

(50:29):
that is making money in practice.
Most of those companiesonly exist on paper,
right.
so they're not making money.
They have no cashflow.
And the, expectation is negative.
And so, I mean, you are literally hopingthat you just get lightning in a bottle
that, you buy it, it goes up and youcash in and walk away with the money.

(50:51):
Like, rolling dice or playingcards or something like that.
Yeah.
Hey, I was telling bill, I went toa casino with my sister over the
holidays and it was his slots only.
I'm not a big fan of slot,
I'm going to take you to a craps table.
I, I, I did a few rollsor spans or whatever.
I have no idea.
I ended up winning 1, 283.
So 1, 280.

(51:11):
I'm like, Ooh, I'm rich.
And like you said, I just cashedout, but that was a complete gamble.
I usually will get 300 and I'll goentertain myself, and that's what I do.
So I had no expectation oflike actually earning anything.
So
yeah, no, I mean, that, that, That'swhy gambling is fun, because the
outcome is uncertain, and you couldwin, you could be, some people are

(51:32):
Yeah.
it
Yeah.
Well, be you.
Well, we're going to do the crapstable and I love blackjack too.
well, craps is a, great game,because it's the only game where you're
allowed to throw things and yell,
oh wow.
So, yeah, I always see them
doing that.
So, , I'm going
to, I live in Ohio,Ohio gambling is legal.
So we have casinos allover the place here.

(51:53):
So it's not that big a deal, but yeah, I'mgoing to have to try the craps table then.
ha!
You can think you're smart, but thethird question and we'll try and roll
through these pretty quickly becauseI want to get to a couple of those
portfolios of risk parity so peopleunderstand what they look like is what
is the upside of this investment andwe'll just let that be what it is.
Then you ask, of course,what is the downside?

(52:14):
And importantly, you need to knowwho is on the other side of the
trade, which are often big pensionfunds, much smarter people than us.
So that's why we want to stick withthe averages and buy the market, buy
the haystack, as John Vogel says.
Yeah, that's, why you want to justbuy like an ETF and sit on it and
you're not in and out of there, ifyou're going to be buying And selling

(52:34):
options, know, the people on theother side of that are professionals.
So you better know what you're doing.
And then we ask ourselves number six,which is what is the investment vehicle?
You want to describe that?
in this case, we're talking about funds.
So they're either mutual fundsor exchange traded funds.
That's the investment.
Vehicle or it could be a share of stockor it might be a real estate partnership

(52:57):
or even the real estate itself youcould buy physical precious metals.
I wouldn't recommend you do that You canbuy those in etf forms and you should
buy everything in an etf form these daysIf you can do it because it's the most
efficient way to do it Even if you'regoing to buy Bitcoin, go buy an ETF.
you don't need to be fiddling aroundwith wallets and things like that.
Which
but

(53:17):
recommend?
everybody wants to buy Bitcoin,which is your favorite.
the most popular one is IBIT.
It's the iShares, BlackRock one, I B I T.
There you
Okay.
We were not giving advice,
like 12, they're literally like 12of them now and everybody's got one,
that one is the most popular andwhy relatively cheap and it's very
liquid, which means it trades a lot.

(53:37):
And that means you're going to geta penny spread on the cost of it.
And then we asked ourselves number seven,what does it take to be successful?
What does it take to be successful?
Frank,
well, that's a question askingis, do I need to be like
some kind of active trader?
How knowledgeable do I needto be successful at this?
Or can I just kind of buy it and siton it or buy it and rebalance it and

(53:57):
not have to think about it too much.
It's sort of like, how much effort,knowledge, and skill do I need to succeed?
In this kind of investment.
And typically you need, a lot of skillif you're talking about a business or
active trading, or you need skills.
If you're going to invest in real estateall investments require some level of
skill, but the least level of skill is.

(54:21):
Buying some kind of indexfund and sitting on it.
Then know that doesn't require much skill,which is why it's a, it's a good thing.
Or even like a target date fund.
Those have become verypopular, of an easy button.
Oh,
I won't get you on those.
But just saying that most, companiesnow, that's what they default
you in if you choose nothing.

(54:42):
So that's why I mentioned
those.
That's the cover of their butts.
the ultimate simplicity principle where itbecomes too simple, according to Einstein.
And Frank does have many rants on this.
He's not a
Well, that's episode,
episode three 33.
We'll break down thetarget date funds for you.
and if you don't like all yellingand the weirdness, Listen to episode

(55:02):
369 where I took that episode,stuck it in a large language model
podcast creator that created anartificial podcast of the same thing
Well, and that is your risk.
That is the risk
without having to listen to me,listen to , some very pleasant
artificial intelligence,
AI characters.

(55:23):
they
we were
either.
talking about that area.
We don't use AI to create our podcasts.
They're real.
They're palpable.
They're raw.
And with Frank, it's especially raw.
The last couple of questions are prettystraightforward to who is getting a cut
and how does it impact your portfolio?
That's where risk paritysomewhat comes in there.
And then finally need to ask yourself.

(55:45):
I mean, does it make sense foryour portfolio, your style, your
risk profile your reward needs inorder to get where you want to go?
Right?
Yeah.
love these questions that heput together because it kind of
covers, all of bases of questions.
you can tell David was a professionalinvestor and work for institutions because

(56:05):
he's really got all, in line as to sortof what are all of the things I need to
know about this before I invest in it.
But those last two questionsend up being the most important.
Because really for, two reasons, Imean, the first question nine, does
this serve a purpose in my portfolio?
you basically want every assetin there to be, have a job,

(56:26):
and this is the job it's doing.
this does well when things are growing,this does Well, in a recession.
This is when the world goes crazy.
You want to be able to have allof these kind of little different
assets that are doing those things.
But then when you get to 10, it'ssort of like, should I invest?
Because you only have somuch room in your portfolio.
you can't put everythingin the world in it.

(56:47):
And if you're taking something and puttingit in, you have to take something out.
And so you really have to ask, is this.
Asset a going to do this job betterthan asset B. And so that is really
what you're kind of asking in the end,in terms of your personal, portfolio.
And so good example is if you areaccumulating versus decumulating,

(57:08):
And you have a bond fund.
You probably don't need a bondfund when you're accumulating.
So it doesn't, serve a purpose foryou and it would be taking up space
in your portfolio that could beoccupied by an index fund that's going
to grow more and accumulate more.
So if you have that purpose, you probablydon't want the bond fund in there, but
if you're in retirement and you wantsomething that is going to perform.

(57:31):
Well as recession insurance or just bea stable thing that you can take from
then, then you do want it because ithas a purpose and it's worth some space.
In your portfolio.
I actually use those questionsbefore my podcast became popular.
I have about 1500 regular listeners.

(57:51):
But of my first episodes, Iuse that as those 10 questions
to analyze various assets.
And if you go to the podcast page,there's actually a list of a bunch of
different common funds and investments.
And then will cue you to go to.
particular podcast to hear aboutthe 10 questions about that.
So I know off the top of my head thatpodcasts 12 and 40 are about gold.

(58:14):
And if you wanted to run the 10 questionsabout gold, you'd listen to those.
There is a list there if you'reinterested, people keep asking
me to do more of those and it'slike, well, I got all these
other questions I need to answer.
I can't, I can't
Well, I mean,
Well, that gets us to the questionsand begs the question to close out.
And we don't want tooverwhelm our audience.
We want to give an idea of what does arisk parity portfolio really look like?

(58:36):
And you have six in yourexperiment, your dive bar.
But I really want to go over thefirst Three just in brief in brevity
you call them the all weather or allseasons portfolio, the golden butterfly
portfolio and the golden ratio portfolio.
You have three others thatare much more complicated, but
these give folks an idea what.
to eight now, Bill.

(58:58):
Okay, well, you can tell Idon't listen every week, but.
Frank loves this stuff.
And there's some people out
We're,
love this stuff and they want to get alittle deeper and you've provided that for
it is really the second two that are ofparticular interest and everything else
on there is there for a different reason.
So let's talk about those though.

(59:19):
So starting with that all seasonsone, that is the portfolio that
Ray Dalio recommended to TonyRobbins and money master the game.
And so what it representsis a reference portfolio.
Or if I was going to construct a simpleclassic risk parody style portfolio, it
would probably look something like this.
And you'll see it's rather bond heavybecause it's really trying to balance

(59:43):
out the volatilities of the assets.
When I looked at somethinglike that, and I did read this
stuff, as it was coming off.
I read Bridgewater papers back in 2011before, they really had a website.
But the, reason I put that thereis because that's what people think
of when they think of risk parity.
They think of that.
That is not something youprobably want to retire with.

(01:00:05):
So we keep it there as a reference Justso we can have something to compare the
other ones against really is what it'sfor, because it's got too many bonds
and it's only 30 percent in stocks thatviolates the macro allocation principle
that we learned from bill banging that,no, you really want to have a portfolio.
That's at least 40 percent stocks.
If you're going to have agood drawdown portfolio.

(01:00:26):
Just to
reiterate for people in ouraudience, it's 30 percent total
U. S. stocks, 40 percent long termtreasuries, 15 percent intermediate
treasuries, yes, very bond heavy, 7.
5 percent gold, and 7.
5 percent commodities.
We can't go into which fundsyou use to do that, but you
outline them on your website.
And these are some investmentsthat are vehicles that our

(01:00:48):
audience is less familiar withor less interested in, honestly.
And that's why we're trying towake them up to this a little bit.
the second one was the golden butterflyportfolio, which I find interesting.
And the butterfly is a goodmetaphor or image for this.
yeah, the golden butterflyportfolio is invented by
Tyler who runs portfolio charts.
And that's a website thatyou should get familiar with

(01:01:11):
To analyze your portfolio andlook at the efficient frontier,
To analyze your portfolio on a wholevariety of metrics, including safe
withdrawal rates and other things.
And it's got like 19 sample portfoliosso you can easily compare what
you're thinking about investing inwith everything from core force to
Merriman ultimates, to Bogle hadthree funds to, the ID portfolio.

(01:01:33):
and it's like an OG.
and we go back to the earlyretirement extreme boards with
Jacob Lundfisker in, say, 2010.
So I remember when Tyler rolled out hissite in around 2015, which was Like, eye
opening because I had spent five yearstrying to figure, just kind of guessing.

(01:01:55):
Because we didn't have data.
We didn't, there were so many thingswe didn't have then that we have now.
So there was like, I had no realway of figuring out, well, what
is the safe withdrawal rate ofportfolio a versus portfolio B the
resources weren't there unless youwere a professional or an academic
and had access to a bunch of stuff.
So he put all this stuff together.

(01:02:17):
got all of this data together.
It goes back to 1970 and covers.
like, 10 different countriesand 15 different asset classes.
I mean, you can go there and basicallyput in a whole variety of different
portfolios and check them out on hissite, but he developed the golden
butterfly based on what was called thepermanent portfolio, which was invented.

(01:02:39):
Around 1980, actually.
And so that portfolioand he was designing it.
How can I get kind of the bestrisk reward out of a portfolio?
And so what he ended up with istaking that old permanent portfolio.
Which was one quarter stocks, one quarterbonds, one quarter gold, and one quarter

(01:03:00):
cash re imagining a little bit, addingmore stocks to it, splitting the stocks
into essentially growth and value.
So what you end up with is percent ina total stock market fund, 20 percent
in a small cap value fund, 20 percentin long term treasury bonds, 20
percent in short term treasury bonds.
And 20 percent in gold.

(01:03:20):
And it's called the golden butterfly.
Cause the gold is like the head and thebonds and the stocks are like the wings.
Like,
You didn't know that.
know that I could, certainly imagine it.
so and he's written extensively on that.
I mean, he's been writing therefor almost a decade now, all kinds
of articles about various assets,various combinations, all kinds of.

(01:03:45):
Interesting analysis.
But that is really should be primarysource for anybody who's really
interested in, details of this and,and his charts are just really fun to
use because he's got, a great one thatis safe withdrawal rates that has on
one axis years, like 15 through 45.
And then you can see how.
For a given portfolio, the safewithdrawal rate would change.

(01:04:07):
Most people think of, Oh, it's 30 years.
It's only this one here.
It's like, no, you can have 25 years.
You can have 40 You can look at whatthe curve is on the whole site there
for most portfolios that you can devise.
So anyway I would definitely check thatout if you're interested in this topic,
because it's, of fundamental these days.
And Jackie, the last one he sort of and Ithink, did you come up with this, Frank,

(01:04:31):
the,
golden ratio.
Yeah, that's my contribution to this
And it's the golden ratio is 1.
6818, which makes it sound verycomplicated, but the golden
ratio is a symbol for balanceknown as the phi symbol.
And without overwhelming people, I justwant to iterate just what's in there.
In it, and it's 42 percentstocks split between large cap

(01:04:51):
growth and small cap value.
26 percent long termtreasuries, 16% is it?
Gold
gold.
And then remaining, you havea 10 and a six allocation, and
those are kind of flexible.
And what I've put in for the 10 these days
is.
Is it managed futures fund?
And then the 6 percentin that, example is cash.

(01:05:14):
on that note, I think ouraudience's brains just exploded.
I know.
I know Jackie's just exploded
Yeah, I did.
and that's where it becomesa little complex for me.
Um,
that way on the surface.
does.
take some time to get into this,but mean, don't confuse being
unfamiliar with something inthinking it's too complicated.

(01:05:36):
Because as I say, it's,not that complicated.
It's basically just let's make aportfolio that has a few more funds in
it that are more diversified becauseit has a better safe withdrawal rate.
then apply some basic rebalancing rules.
And that's it.
Yeah.
Don't let the name, theGolden 6185 PHI Balance.

(01:05:57):
Don't let that name scare you.
well, I think, how do you say it?
Our radio signal.
Is starting to fade.
But now I see our signalis beginning to fade.
that's how you close your show.
And we've kept ourselves to whatJackie, I think wanted us to, our
first episode with you is aboutan hour and 50 minutes long.

(01:06:20):
Put it all on me.
Okay.
Put it all on me.
go on forever.
Maybe we need to add about 30minutes of Spongebob to the show.
But we're very appreciative of this sneakpeek as you will or and comprehensive look
on the other side of what risk parity is,what looking on investment is deciding.

(01:06:43):
The difference between accumulationand drawdown, which people
don't necessarily think about.
I mean, I find this very illuminatingand I hope our audience has too.
Right, Jackie?
Yeah, I think so too.
And we love introducing newconcepts to our audience.
It may not be for everyone.
It may not be for you right now, but justthe knowledge of understanding what risk
parity is, what the goal of even tryingto do risk parity, basically another level

(01:07:08):
of diversification it's just going tomake you wiser and give you more choices.
As you decide how you want to constructyour portfolio, not just now, but as
Frank was saying at the distributionphase, at some point, you're going to
be ready to draw down your portfoliois probably going to look a little
different than in the accumulation phase.
And plus we always love to hang outwith uncle Frank, he's in our Facebook

(01:07:32):
group, come join us there, but hejust has such extensive knowledge on,
on Everything investments portfolio.
And we just love to pick his brain.
And when we ask questions,he does answer them.
So Frank this has been fun.
This has been entertaining.
This has been illuminating.
We're going to have youback again and again.

(01:07:52):
And maybe we'll just have to doa whole humor episode sometimes.
So we can have youlaughing the whole time.
on Spongebob, Talladega Nights, andwhatever is, , rummaging around in there.
Beavis and Butthead in there.
we, we, we
Fire!
Fire!

(01:08:14):
What's your SpongeBob clip?
Oh,
gosh.
These days probably somethingwith Patrick Starr in it.
, actually, I think the Sailor Mouthepisode probably takes the cake.
When they learn swear words,but they cover them up on
the show with dolphin sounds.

(01:08:40):
So they're cursing at each other,but it's all these dolphins.
Well, , Jackie, any closing thoughtshere on this, Frank episode?
well, I like putting Frank on the spot.
So Frank, we have a newadministration coming in, in 2025.
Anything you would consider doingdifferent or things to watch out
for as a result of that change.

(01:09:04):
if you have a robust portfolio,which I mean, most people do if
they're invested in index funds.
No, I, would not change a thing.
I mean, I think it's very unpredictablebecause some of the policies that
have been talked about would bevery deflationary and some of
them would be very inflationary.
And we're at ForrestGump's box of chocolates.

(01:09:26):
You never know what you're going to get.
Yeah.
I think bill and I 100 percentagree with you on that,
I will say that, markets do not likeunpredictability which to me, it was,
funny if you look at sort of the electionand what's gone on since then, it's
sort of like, okay, the election's over.
We know who won.
Things are predictablenow for like a month and

(01:09:49):
right?
market goes up.
Everybody's like, Yeah.
yeah, I know what's going to happen.
And then in December, it'ssort of like, Hey, wait, we
have no idea what's going on.
Yeah.
So you heard it from,
look, you heard it from FrankVasquez himself, and he's basically
saying, there's really nothingyou should be doing different.
We've gone through many, manyadministrations throughout history, but

(01:10:12):
I think that question Gets asked a lot.
What should I be doing different?
And people have asked me over thelast month or so that same question.
So I figured I would pose that to you.
mean, honestly,
the market's had a great two years.
We should expect less of a goodyear this year, if not worse.
So, people think there's a Trumpbump, be careful that the elections
and administrations do not reallyhave an impact on the market.

(01:10:36):
We've gone over that in a prior
yeah, think,
course and just keep buying,
yeah.
Oftentimes things turn out exactlythe opposite of what people thought.
So the first time Trump was elected,people thought, Oh, this is going
to be great for energy companies.
Everybody go buy energy companies.
They did terrible.
And then Biden gets elected and it'ssort of like, Oh, this is going to
be horrible for energy companies.
Don't buy those, sell those.

(01:10:58):
And they did great.
So just keep that in mind.
Stick to your plan.
Stick to your plan.
All right.
Well, anybody's unpredictable, it's Frank.
You just never know whatyou're going to get.
This has been predictably unpredictable.
We're eternally grateful to you, Frank.
We value your friendship.

(01:11:19):
We look forward to seeing you ateconomy, which is sold out this year.
And just thanks.
Thanks for being here.
Thank you.
It reminds me.
I need to call up Diana again andfind out what she wants me to do.
All
it.
Yeah, this has been amazing, Frank,and thank you to our listeners.
We want to wish you a happy new year.

(01:11:39):
into 2025.
God, haven't the time just flown by, Bill,but we appreciate all of our listeners.
We wouldn't be here withoutyou and we will catch you next
time on Catching Up To Fi.
right, see you next week.
Bye.
The single has faded

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.css-14f5ked{margin:0;word-break:break-word;display:-webkit-box;-webkit-box-orient:vertical;box-orient:vertical;-webkit-line-clamp:2;overflow:hidden;}“The Risk Parity Paradox” an Exercise in Simple Complexity? | Frank Vasquez | 124