In this episode we answer emails from Robert, Jamie and Richard. We discuss transitioning away from a Boglehead Three Fund portfolio due to its obsolete nature, a query about the DBMF prospectus and an early retirement with a 70/30/10 risk-parity style portfolio in the face of some spurious Sonia-like objections.
Links:
Father McKenna Center Donation Page: Donate - Father McKenna Center
Merriman Best-In-Class ETF List: Best-in-Class ETF Recommendations | Merriman Financial Education Foundation (paulmerriman.com)
Morningstar Portfolio Analysis Of VTI: VTI – Portfolio – Vanguard Total Stock Market ETF | Morningstar
VXUS: VXUS – Portfolio – Vanguard Total International Stock ETF | Morningstar
AVDV: AVDV – Portfolio – Avantis International Small Cap Val ETF | Morningstar
AVES: AVES – Portfolio – Avantis Emerging Markets Value ETF | Morningstar
Early Retirement Now Spreadsheet Toolbox: An Updated Google Sheet DIY Withdrawal Rate Toolbox (SWR Series Part 28) - Early Retirement Now
Amusing Unedited AI-bot Summary:
What if your international and bond funds aren't providing the diversification you think they are? On this episode of Risk Parity Radio, we address Robert's inquiry about optimizing his family's portfolio during the accumulation phase. We'll dissect the limitations of total international funds when paired with a U.S. S&P 500 or total market fund, and why they may fail to deliver the diversification you seek. We'll also explore Robert's proactive strategy of reallocating bond investments into stock funds during market downturns and discuss the merits of increasing U.S. stock exposure while rethinking the necessity of international holdings.
We'll further challenge the conventional wisdom of international versus domestic funds and introduce modern alternatives that can bring true diversification to your portfolio. Recommendations from the Merriman Foundation, such as AVDV and AVES, are highlighted for their potential to balance your investments by tilting towards small-cap and value stocks in international markets. Lastly, we dive deep into the complexities of fund disclosures and benchmarks, offering alternative methods to evaluate funds more effectively. Gain insights that will guide you toward a more strategic and diversified investment approach for long-term growth.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Not Uncle Frank (00:01):
A foolish consistency, is the hobgoblin of
little minds, adored by littlestatesmen and philosophers and
divines.
Mostly Uncle Frank (00:10):
If a man does not keep pace with his
companions, perhaps it isbecause he hears a different
drummer, a different drummer.
Mostly Mary (00:19):
And now, coming to you from dead center on your
dial, welcome to Risk ParityRadio, where we explore
alternatives and assetallocations for the
do-it-yourself investor,Broadcasting to you now from the
comfort of his easy chair.
Here is your host, FrankVasquez.
Mostly Uncle Frank (00:37):
Thank you, Mary, and welcome to Risk Parity
Radio.
If you are new here and wonderwhat we are talking about, you
may wish to go back and listento some of the foundational
episodes for this program.
Not Uncle Frank (00:50):
Yeah, baby, yeah.
Mostly Uncle Frank (00:52):
And the basic foundational episodes are
episodes 1, 3, 5, 7, and 9.
Some of our listeners,including Karen and Chris, have
identified additional episodesthat you may consider
foundational, and those areepisodes 12, 14, 16, 19, 21, 56,
(01:13):
82, and 184.
Whoa, and you probably shouldcheck those out too, because we
have the finest podcast audienceavailable.
Mostly Mary (01:26):
Top drawer, really top drawer.
Mostly Uncle Frank (01:31):
Along with a host named after a hot dog.
Not Uncle Frank (01:34):
Lighten up Francis.
Mostly Uncle Frank (01:37):
But now onward to episode 362.
Today, on Rescueri Radio, we'rejust going to do what we do
best here, which is attend toyour emails, and so, without
further ado, here I go onceagain with the email.
And First off.
First off, we have an emailfrom Robert.
Not Uncle Frank (01:59):
You're never home.
You talk to your trucks morethan you do me.
Mostly Mary (02:17):
You never even touch me anymore, bob.
I just can't do this.
And Robert writes McKennaCenter as part of the Financial
Quarterback Match Campaign.
Much of my early professionalbackground involved working with
people experiencinghomelessness and I'm glad you
are using this outlet to supportthe McKenna Center's work.
My wife and I are in theaccumulation phase and we're
interested in your perspectiveon how to approach our family's
(02:38):
portfolio.
For the last seven years we'veutilized a BogleHeads three-fund
index approach, withapproximately 60% in US S&P or
total market funds, 25% in totalinternational funds ex-US and
15% in a total bond fund.
In the last month I startedpurchasing VIOV in our Roth IRAs
(03:00):
to gain additional small-capexposure, but it's a negligible
percentage of our portfolio fornow.
We're between 10 and 15 yearsfrom retirement and after
listening to your podcast Irealized that we don't need to
have a bond fund during theaccumulation phase.
My current plan is to waituntil the stock market goes down
at least 15 to 20 percent, thenshift the money invested in
(03:23):
bonds to an S&P fund, which isthe best option in my 401k
account where the bonds are held.
I would make this move now, butI'd rather not buy so close to
all-time highs.
I'm also considering putting 80percent of our future
investments towards US funds and20 percent towards
international to keep somenon-US exposure, but perhaps
(03:43):
this isn't needed.
As I understand your perspective, broad large-cap international
funds do not truly diversify astock portfolio due to their
strong correlation with the USstock market.
Could you explain this a littlefurther?
I know there are countlessarguments around whether to hold
international funds in aportfolio and I'm trying to
decide whether to maintain ourexposure.
(04:05):
So my question essentiallyboils down to this how would you
advise us, having recentlylearned that the total bond and
international index funds wehold in our portfolio may not be
optimal?
Thanks for your time andperspective, robert.
Mostly Uncle Frank (04:21):
Yes, we can Well.
First off, thank you for yourdonation to the Father McKenna
Center.
As most of you know, we do nothave any sponsors on this
podcast, but we do have acharity that we support.
It is the Father McKenna Centerand it serves hungry and
homeless people in Washington DC.
Full disclosure.
(04:43):
I am on the board and am thecurrent treasurer.
I do want to thank everyone whohas participated in the
financial quarterback matchingdrive.
I still have not gotten thefinal numbers as to exactly how
much we collected on that, butI'll let you know when I do.
And because you are a donor tothe Father McKenna Center, you
(05:03):
got to go to the front of theline, because that's what I
really have to offer you here.
Not Uncle Frank (05:08):
That and a nickel will get your hot cup a
jack squat.
Mostly Uncle Frank (05:14):
Which is not a bad deal, because we're about
two months behind on the emailsright now.
But getting to your email first, let's talk about these total
international funds and why theyare kind of suboptimal for
diversification purposes, atleast when your main holding is
a US S&P 500 or a total marketfund.
(05:36):
So first, I still think a lotof people have this erroneous
belief that a totalinternational stock market fund
and a total US stock market fundare significantly diversified
and we need to actually look atsome data so we can show you
that that's not true, becausepeople tell stories about this
instead of actually looking atthe data.
(05:57):
And the best way to illustratethis is to go to Morningstar and
to put in your funds each oneof these things and then to go
to the portfolio tab, if youwill, and look at where they
fall in what they call the styleboxes, in terms of whether
they're large or small cap andwhether they are value or growth
(06:20):
based, and what you'll seethere is that a total
international stock market fundlike VXUS is a large cap blend
fund, and then you'll also seethat a S&P 500 or total US stock
market fund is also prettyclose to being a large cap blend
(06:40):
fund.
It leans towards growth andkind of sits on the line between
blend and growth.
So you're talking about twofunds that occupy the same area
of that chart, which meansthey're really not well
diversified.
And you can also look at thecorrelation numbers on those
things and find that they're notvery well diversified either.
(07:03):
That's another way to look atit, but I think this
illustration, using the styleboxes, shows you why.
And then if you look under thehoods of these funds, what you
see is that most of the largeholdings in these funds are
large multinational companiesthat do business all over the
world, like Toyota or TaiwanSemiconductor or Amazon or
(07:25):
NVIDIA, and that really the onlydifference between the total US
fund and the totalinternational fund is the sector
makeup, that all of the bigtech companies happen to be US
companies, except for a couplelike Taiwan Semiconductor.
And if you normalized for that,these funds would look very
(07:46):
similar, with lots of companieslike Ford and Toyota and
Unilever and Procter Gamble andbanks lots of big banks.
So you're really not gettingmuch diversification in terms of
what kinds of businesses are inthese two funds.
So what is the kind ofdiversification you're actually
getting most of when you buy atotal international fund.
(08:07):
What it is mostly is currencydiversification, and so if you
know that the US dollar isincreasing in value against
foreign currencies or decreasingin value against foreign
currencies, you know for certainwhether international stocks
are outperforming orunderperforming domestic stocks,
(08:29):
and if you were to normalizefor that, you would see that
these funds are almost exactlythe same.
So all you're really getting isthis kind of currency
speculation when you're justbuying a total international
fund to go with your total USfund, and maybe that's fine,
maybe that's what you want, butthe better way to speculate on
(08:50):
currencies in a portfolio isactually to buy some gold or
something like that, or managedfutures.
Using your stock allocation tobe speculating on currencies is
not really a good use of yourstock allocation in a
diversified portfolio.
Forget about it, and I'd haveto say this is one of the
biggest foolish consistenciesthat we deal with in DIY
(09:14):
investing.
These kinds of portfolios weredevised almost 20 years ago now,
when the available funds werefew, at least ones that were low
cost and index based, and sothis was probably the best you
could do in, say, 2008 or 2009in terms of constructing a
(09:34):
diversified portfolio, but timedid not sit still.
Financial markets did not sitstill.
Diy investing did not sit still.
And if you still think that isthe best practice, you're wrong.
It's two decades out of dateand so just because somebody
said this nearly 20 years ago asa model portfolio and a great
(09:55):
idea doesn't mean it's the bestthing anymore.
It's like a BlackBerry or a faxmachine.
It's not as bad as a faxmachine, but it's more like a
BlackBerry or a fax machine.
It's not as bad as a faxmachine, but it's more like a
BlackBerry.
It's an obsolete portfolioconstruction because we can do a
lot better.
Today.
We have a lot more funds andwe're going to talk about them
here in a minute.
But it is kind of funny thereactions you get when you
(10:17):
confront people with thisinformation, some of which I
just described to you.
Instead of taking in the newinformation and modifying what
they believe based on newinformation, they frequently
reject it out of hand because itcauses cognitive dissonance.
It causes them to say I don'twant to admit that what I have
(10:39):
been doing is suboptimal, and sowhat they will reach for is
either shibboleths like well,past performance is not
indicative of future results,which is a neutral truism that
doesn't mean anything, becauseit applies to everything.
Not Uncle Frank (10:55):
That is the straight stuff.
Oh funk master.
Mostly Uncle Frank (10:58):
Or well, so-and-so, my idol or my club
that I belong to or affiliatewith and identify myself with as
a part of self identity, youbogleheads.
This is what we do there andthis is all we can do there,
because we'd be out of the clubif we did something different.
So we need to rely on thisfallacy of an appeal to an
(11:22):
authority that is obsolete andout of date.
Anyway, fortunately, remedyingthis thing is not very hard if
you want to hold internationalstocks, because we've got all
this great work from theMerriman Foundation in
particular, who have siftedthrough all of the available
funds for factor diversification, both domestic and
(11:46):
international, and theypublished a best-in-class list
of ETFs that you can look at.
I'll link to in the show notesTo make it really easy to pick
better funds than the totalinternational fund to diversify
a portfolio that is largelyinternational, us total market
or S&P 500.
And what makes the most sensethere is because the S&P 500 and
(12:11):
US total market is in thatlarge cap blend to growth area.
What you really want to have outof your international stocks is
a value-based tilt and asmaller cap tilt, and so there's
a great fund out there calledAVDV that they've reviewed and
recommend.
That makes a whole lot of sensein this context.
(12:33):
It is small cap value ininternational developed markets,
and there are also a couple ofother ones, one that is AVES,
which is value generally inemerging markets, and that is
also an option, and so both ofthose are going to have similar
performances to a totalinternational fund but be more
(12:57):
diversified from the US totalmarket or the S&P 500, and
therefore just a better thing toput in a portfolio with that,
because these kind of fundsweren't around 20 years ago and
I understand why people couldn'thave used them before, but now
that we're in the 2020s and wehave all these better funds
available, there's no reason notto use them, other than wanting
(13:21):
to be foolishly consistent orbe in the club.
Not Uncle Frank (13:25):
Please accept my resignation.
I don't want to belong to anyclub that will accept me as a
member.
Mostly Uncle Frank (13:31):
So if you want to maintain your
international allocation but doit better, the easiest way is
simply to swap out theinternational fund you have now
and use some of these ETFs thatare recommended by the Merriman
Foundation, including AVDV andAVES, and that can also be part
(13:53):
of your value-tilted allocation,because, ultimately, what you
want to have in this portfoliois half of it be tilted towards
growth, like this total marketfund is, and half of it be
tilted towards value, and someof that being small, because
those kinds of portfolios havethe best kind of diversification
(14:14):
properties.
Now, I'm actually very agnosticas to whether you have
international exposure in yourstock holdings or not.
I have a little bit of it inour personal portfolios.
I haven't found that it's madea whole lot of difference, and I
do consider it largely acrapshoot as to whether the US
(14:34):
dollar is going to be strong orweak, and that is going to
determine most of the differencein performance anyway.
So you should just do whateveryou're comfortable with there,
all right.
Now let's talk about this bondfund.
Now you only have 15% allocatedto the total bond fund, and so
having an 85-15 portfolio is agrowth portfolio, and a lot of
(14:58):
people hold those kind of thingswhile they're accumulating,
although you're correct, it'snot optimal for accumulation.
But honestly, whether aportfolio is 90-10 or 100-0 is
almost a coin flip as to whichone's going to do better in, say
, a given decade.
But if you're going totransition it, I probably would
not try to market time it,although you could.
(15:20):
What usually makes the mostsense and feels the best
psychologically is to simplyschedule this and kind of dollar
cost average it over a periodof time so you don't have to
worry about monitoring themarket and just say, well, I'm
going to move 2% every month or3% every month for a period and
that'll get you to where you'regoing in kind of the
(15:43):
psychologically most comfortablemanner, because I realize it's
not very psychologicallycomfortable to just take that
and move it right now wheneverything's at an all-time high
.
Now one thing that's not clearto me is whether you hold those
bonds in a taxable account or aretirement account.
They really do belong in aretirement account because they
(16:03):
generate ordinary income and youdon't want them in a taxable
account because of the taxes.
If you do decide to keep somebonds, for whatever reason, and
are looking for maximumdiversification from your stocks
, I would look at the niceVanguard treasury bond ETFs now,
the little suite of them.
They have that those work verywell as the bond allocation in a
(16:25):
portfolio, and those are VGSHfor the shorter one, vgit for
the intermediate one, whichwould be the most similar to BND
, and then VGLT for thelong-term one.
And I realize you probablydon't need any of those now, but
I thought I would just mentionit, so you had it there.
Not Uncle Frank (16:46):
Yes.
Mostly Uncle Frank (16:48):
And hopefully that all helps and
thank you for your email.
Mostly Mary (16:52):
Frank.
I'd like to thank Robert forhis paragraphs.
They're very nice.
Mostly Uncle Frank (16:57):
Mary, Mary, I need your huggin' Second off,
Second off, we have an emailfrom Jamie.
Oh my gosh, oh my gosh.
Mostly Mary (17:21):
And Jamie writes Frank, I was perusing the DBMF
summary prospectus sent to merecently.
It says effective April 29,2024, the IMGP DBI Managed
Futures Strategy ETF's primarybenchmark changed from the SGCTA
index to the Bloomberg USAggregate Bond Index.
(17:42):
The SGCTA index is now thefund's secondary benchmark.
Huh, why would a managedfutures fund use a bond index as
a benchmark?
Mostly Uncle Frank (17:55):
Thanks, jamie.
Well, jamie, the answer is Ihave no earthly idea as to why
they picked those particularindexes and those particular
orders, why they picked thoseparticular indexes and those
particular orders.
I will tell you that these kindof forms, because they are filed
(18:15):
with the SEC, are fly-speckedendlessly by corporate lawyers,
and so what is in them generallyhas everything to do with what
the lawyers think is the rightthing to report, because these
kind of disclosures aresomething that a fund manager
can get sued over if there'sanything inaccurate or
inappropriate in them.
Personally, I've never reliedon any benchmarks and any
(18:37):
prospecti or prospectuses,simply because they often are
not that accurate in myexperience.
And so the better way toapproach this, at least with
most funds I'm not sure you cando it with a managed futures
fund, but for stock and bondfunds, you go to, like
Morningstar, look at theportfolio construction and see
(18:57):
sort of where does it fall interms of sectors, in terms of
factors, and then you cancompare it with something that's
appropriate in the same factoror sector makeup.
So I guess what I'm saying isdon't worry yourself over it,
because I don't think it reallymatters for any practical
purpose in the end.
Not Uncle Frank (19:18):
Forget about it .
Mostly Uncle Frank (19:21):
What you're really going to be ultimately,
comparing a fund like DBMF to orother funds in the same
category like KMLM or MFUT orCTA and a lot of those are
relatively new, but that's whatI would be looking at.
You certainly would not useDBMF as a substitute for a bond
fund under any circumstances,because it's not a bond fund.
(19:43):
Sorry, I couldn't be of morehelp on that, but thank you for
your email Last off.
Last off, we have an email fromRichard, dr Richard, in fact.
Not Uncle Frank (20:07):
Yes, oh, richard, I'm so happy, hold me.
Mostly Uncle Frank (20:13):
And Dr Richard writes.
Mostly Mary (20:16):
Loved.
Your Trogdor recording Broughtback great memories.
It's still how I draw a dragon.
Not Uncle Frank (20:22):
To begin, draw an S for snake or dragon or
whatever.
Next we'll draw a moredifferent S for the head.
Put a top mark on a long V,then you add some legs.
Draw on a couple of arms Whoa,wait a minute.
(20:44):
I think I need to start over.
This thing doesn't look natural.
Mostly Mary (20:51):
So I've been running through your podcast and
I think I'm in an unusualsituation.
I'm looking at retiring ortaking a bit to reset from a
high-stress, high-income job andI'm moving to the southern
coast of Spain at 39.
Geological arbitrage for thewin.
Not Uncle Frank (21:07):
Yeah, baby, yeah.
Geological arbitrage for thewin.
Yeah, baby, yeah.
Mostly Mary (21:10):
While I can always go back to work if I want to,
I'd hate to leave my current joband have to go back to work
because of money issues, as mycurrent situation took decades
to build up.
I've always been nearly allstocks but have shifted into a
risk parity portfolio.
I personally don't love theidea of leverage but still need
to be a bit more aggressivesince I have a longer timeline,
(21:32):
potentially 60 years.
I did some portfoliooptimization through Portfolio
Visualizer.
However, some friends have saidI'm just curve fitting what's
worked best for the last 50years.
The portfolio I put together, Ithink, carries a lot of your
basic principles 70% stocks, 35%large cap growth, 35% small cap
(21:53):
value, 20% long-term treasuries, 10% gold.
This spits out a 5.7% safewithdrawal rate and a 4.95%
permanent withdrawal rate.
On Monte Carlo simulations, Iactually couldn't find a
five-year period since the 70swhere it went down with a 5%
withdrawal.
It seems aggressive.
(22:14):
Slash safe with the principlesyou discussed of very
non-correlated assets 40 to 70%stocks, higher end as need,
bigger returns, but getting abit nervous as practice sale and
final deadline approaches thatI'm missing something important.
Bit nervous as practice saleand final deadline approaches
that I'm missing somethingimportant.
What do you think of thisportfolio and would you change
(22:36):
anything?
Not Uncle Frank (22:39):
Thanks, again for what you do and feel free to
visit me in Malaga Lease startsin October.
Mostly Uncle Frank (22:46):
Groovy baby.
Not Uncle Frank (22:46):
Well, if you're going to mention Trogdor again,
you're really going to get intoa can of worms here.
Okay, starting again the sameway, s more different S Close it
up real good at the top for hishead and then, using consummate
Vs, give him teeth, spinitiesand angry eyebrows, and you can
add smoke or fire or maybe somewings.
You know, if he's a winglingdragon, let's put one of those
(23:09):
beefy arms back on him for goodmeasure.
That looks really good Comingout of the back of his neck
there.
Now he needs a name.
How about Togdor the Burninator?
Oh yeah, check out all hismajesty.
Mostly Uncle Frank (23:30):
Those little cartoons were some of our kids'
favorite things to look at andrepeat over and over again when
they were growing up, and it'sone of the reasons they're
featured on this podcast.
So there's lots of familynostalgia involved there.
Mostly Mary (23:47):
That's not an improvement.
Congratulations on moving toSpain.
Family nostalgia involved there.
Mostly Uncle Frank (23:49):
That's not an improvement.
Congratulations on moving toSpain.
That's where Mary and I had ourhoneymoon Over 30 years ago, in
fact.
Not Uncle Frank (23:58):
Marriage, marriage, marriage is what
brings us together today.
Mostly Uncle Frank (24:06):
It was a lot less popular then than it is
today.
But now let's tend to yourquestions here.
So you have a portfolio that is35% large cap growth, 35% small
cap value, 20% long-termtreasuries and 10% gold, and
that is a good portfolio thatshould yield about a 5% safe
(24:28):
withdrawal rate over the past100 years or so.
What I would do, in addition towhat you've done already, is
download the toolbox from earlyretirement now, because when
I've run portfolios like this inthere I have got safe
withdrawal rates of about 5%.
It is a little bit difficult touse, in particular putting in
(24:48):
the large cap growth small capvalue variations, because it's
not intuitive the way that works, but hopefully you can figure
it out with the instructions.
Now it is on the moreaggressive end of portfolios in
terms of the stock allocation.
That 70% is usually the upperlimit for good safe withdrawal
rates.
That 70% is usually the upperlimit for good safe withdrawal
(25:10):
rates because they tend todeteriorate when you go higher
than that due to the volatilityof the stocks.
So I would not expect thisthing to perform much
differently than something thatwould say 60% stocks.
It will have higher returns ingood years, but it will be more
volatile in bad years, but itwill be more volatile in bad
(25:32):
years.
Bill Bangan thinks that theoptimal amount of stocks for a
highest safe withdrawal rate aresomewhere between 50 and 60
percent, but other people havedisagreed and the range seems to
be between 40 and 70 percent.
I think the most important partabout that stock allocation,
though, is your division intogrowth and value, because that
really gives you an extra formof diversification that would
(25:53):
not be there if you were usingsimply an S&P 500 fund, for
example.
If you want an illustration ofthat, you can compare what value
funds like a small cap valuefund and a large cap growth fund
did in 2022, because that is avery good example of how
diversified these factorallocations can be, and you do
(26:14):
want to be able to rebalancethose over time against each
other.
Now, I'm assuming you're alsousing variable kind of
withdrawal strategies in termsof the money coming out, and
those can include usingguardrails, for example, where
you would not take out as muchwhen the portfolio was
performing particularly badlyand then would take out more
(26:35):
later, and I would think thatyour personal rate of inflation
would be less than that of theCPI, which is what this is based
on, and both of thosewithdrawal strategies will give
you between 0.5 to 1.2 extrapercent on your safe withdrawal
(26:56):
rate, which essentially acts asa buffer.
I do have to laugh at what yourfriends say.
I'm wondering if any of themare named Sonia.
Mostly Mary (27:06):
My name's Sonia.
I'm going to be showing you thecrystal ball and how to use it,
or how I use it because this isactually not curve fitting.
Mostly Uncle Frank (27:16):
When you're using that lengthy amount of
data and you're only using somebroad asset classes.
It would be curve fitting ifyou had 10 different funds or
things like that that were veryidiosyncratic, because the more
different kinds of things youstick into a portfolio, the more
you're going to have a problemwith curve fitting.
(27:37):
You don't have a problem withcurve fitting when you only have
a few things in the portfolioand you have a very long series
of data, particularly when theasset classes are as broad as
the ones you're talking about.
So in other words, your friendsdon't understand how that part
of it works.
Mostly Mary (27:54):
That's not how it works.
That's not how any of thisworks.
Mostly Uncle Frank (27:58):
And this is why the Fama-French analysis and
factor investing has shown tobe working, at least for these
three-factor and five-factormodels.
It doesn't work for every factorthat somebody ever came up with
, because there are hundreds offactors that academics have
examined, but the ones that weknow and love being small versus
(28:23):
large and growth versus valuedo have meaning and do work
pretty well over very longperiods of time.
The question I always have forpeople who say things like that
is that well, okay, let's justtake your proposed portfolio and
compare it to this one onwhatever metrics you want to
compare it on.
Because that's the issue here.
You're not taking a portfolioand just saying it's this or
(28:47):
nothing.
You are always comparing it toanother portfolio.
And the kinds of portfoliosthat are typically looked at the
simple ones, which are just,say, s&p 500 and bonds, just
don't perform as well as thesemore diversified ones on
basically any metric that youcan apply to them, and you could
(29:08):
say that they are just ascurve-fitted as this one in many
respects because they are largecap tilted.
Mostly Mary (29:16):
You can actually feel the energy from your ball
by just putting your hands inand out.
Mostly Uncle Frank (29:22):
And have other idiosyncrasies.
So what I'm getting at here isthis is another one of these
kind of neutral truisms likepast performance is not
indicative of future results.
When you're just saying thatand saying, well, that applies
to your portfolio, well, itapplies to every portfolio, so
what meaning does it have?
(29:42):
That is not a basis forcomparison between two
portfolios.
Mostly Mary (29:48):
Now you can also use the ball to connect to the
spirit world.
Mostly Uncle Frank (29:52):
Now the rigorous way you would test for
curve fitting is this you wouldtake a segment of data, come up
with a portfolio that performswell in that segment of data and
then take a different segmentof data and run it through that
and see whether the performancesare similar.
You can actually do that withwhat you're doing, since you
(30:12):
have the 50-year set of data.
If you go compare it with the100-year set of data or the
earlier set of data that goesback to the 1920s, you're going
to get similar results.
The reason you're gettingsimilar results is these things
are ultimately based onperformance during particular
economic environments.
The advantage of using somethingthat goes back to 1970 is that
(30:36):
you've covered just about everyeconomic environment you're
likely to have outside ofnuclear war, because you've had
inflationary environments likethe 1970s.
You've had deflationaryenvironments, like the early
2000s, and those are the twoproblem areas.
For decades where the stockmarket performs pretty well,
(30:56):
like the 80s, 90s or 20-teens,you're not going to have any
problem whatsoever almost withany kind of portfolio that has a
lot of stocks in it.
So these casual criticisms yourfriend sonja is leveling upon
you don't hold a lot of waterand don't actually answer the
question as to, well, what kindof portfolio should you hold, if
(31:19):
not the one that you've come upwith, a really big one here,
which is huge.
My suspicions is that sonia isjust afraid to spend money, and
so is projecting her fear uponyou, which I find common in
these quarters, leading topeople having 2.5% safe
(31:39):
withdrawal rates and things likethat.
Mostly Mary (31:41):
That's not an improvement.
Mostly Uncle Frank (31:44):
Anyway, congratulations on your big move
, and I would like to go toMalaga, but it probably won't be
this year, and thank you foryour email.
Not Uncle Frank (31:56):
Trogdor strikes again.
Mostly Uncle Frank (31:59):
But now I see our signal is beginning to
fade.
I'm not sure we're going tohave a podcast this weekend.
We shall see.
Mary and I have about fivenieces and nephews to take care
of and she's already off to workon that issue.
But I will be joining her inthe next couple days.
But in the meantime, if youhave comments or questions for
(32:20):
me, please send them to frank atriskparityradarcom.
That email is frank atriskparityradarcom.
Or you can go to the website,wwwriskparityradiocom, put your
message into the contact formand I'll get it that way.
If you haven't had a chance todo it, please go to your
favorite podcast provider andlike subscribe.
Give me some stars, a follow, areview.
(32:42):
That would be great.
Okay, thank you once again fortuning in.
This is Frank Vasquez with RiskParity Radio, signing off
Trogdor.
Not Uncle Frank (32:56):
Trogdor.
Trogdor was a man.
I mean he was a dragon man.
I mean he was a dragon man.
I mean he was just a dragon,but he was still Tronca, tronca,
(33:24):
burninating the countryside,Burninating the peasants,
burninating all the people inthe thatched roof cottages,
thatched roof cottages, and thetruck door comes in the night.
Mostly Mary (33:52):
And the truck door comes in the night.
A foolish consistency, is the hobgoblin of
little minds, adored by littlestatesmen and philosophers and
divines.
Mostly Uncle Frank (00:10):
If a man does not keep pace with his
companions, perhaps it isbecause he hears a different
drummer, a different drummer.
Mostly Mary (00:19):
And now, coming to you from dead center on your
dial, welcome to Risk ParityRadio, where we explore
alternatives and assetallocations for the
do-it-yourself investor,Broadcasting to you now from the
comfort of his easy chair.
Here is your host, FrankVasquez.
Mostly Uncle Frank (00:37):
Thank you, Mary, and welcome to Risk Parity
Radio.
If you are new here and wonderwhat we are talking about, you
may wish to go back and listento some of the foundational
episodes for this program.
Not Uncle Frank (00:50):
Yeah, baby, yeah.
Mostly Uncle Frank (00:52):
And the basic foundational episodes are
episodes 1, 3, 5, 7, and 9.
Some of our listeners,including Karen and Chris, have
identified additional episodesthat you may consider
foundational, and those areepisodes 12, 14, 16, 19, 21, 56,
(01:13):
82, and 184.
Whoa, and you probably shouldcheck those out too, because we
have the finest podcast audienceavailable.
Mostly Mary (01:26):
Top drawer, really top drawer.
Mostly Uncle Frank (01:31):
Along with a host named after a hot dog.
Not Uncle Frank (01:34):
Lighten up Francis.
Mostly Uncle Frank (01:37):
But now onward to episode 362.
Today, on Rescueri Radio, we'rejust going to do what we do
best here, which is attend toyour emails, and so, without
further ado, here I go onceagain with the email.
And First off.
First off, we have an emailfrom Robert.
Not Uncle Frank (01:59):
You're never home.
You talk to your trucks morethan you do me.
Mostly Mary (02:17):
You never even touch me anymore, bob.
I just can't do this.
And Robert writes McKennaCenter as part of the Financial
Quarterback Match Campaign.
Much of my early professionalbackground involved working with
people experiencinghomelessness and I'm glad you
are using this outlet to supportthe McKenna Center's work.
My wife and I are in theaccumulation phase and we're
interested in your perspectiveon how to approach our family's
(02:38):
portfolio.
For the last seven years we'veutilized a BogleHeads three-fund
index approach, withapproximately 60% in US S&P or
total market funds, 25% in totalinternational funds ex-US and
15% in a total bond fund.
In the last month I startedpurchasing VIOV in our Roth IRAs
(03:00):
to gain additional small-capexposure, but it's a negligible
percentage of our portfolio fornow.
We're between 10 and 15 yearsfrom retirement and after
listening to your podcast Irealized that we don't need to
have a bond fund during theaccumulation phase.
My current plan is to waituntil the stock market goes down
at least 15 to 20 percent, thenshift the money invested in
(03:23):
bonds to an S&P fund, which isthe best option in my 401k
account where the bonds are held.
I would make this move now, butI'd rather not buy so close to
all-time highs.
I'm also considering putting 80percent of our future
investments towards US funds and20 percent towards
international to keep somenon-US exposure, but perhaps
(03:43):
this isn't needed.
As I understand your perspective, broad large-cap international
funds do not truly diversify astock portfolio due to their
strong correlation with the USstock market.
Could you explain this a littlefurther?
I know there are countlessarguments around whether to hold
international funds in aportfolio and I'm trying to
decide whether to maintain ourexposure.
(04:05):
So my question essentiallyboils down to this how would you
advise us, having recentlylearned that the total bond and
international index funds wehold in our portfolio may not be
optimal?
Thanks for your time andperspective, robert.
Mostly Uncle Frank (04:21):
Yes, we can Well.
First off, thank you for yourdonation to the Father McKenna
Center.
As most of you know, we do nothave any sponsors on this
podcast, but we do have acharity that we support.
It is the Father McKenna Centerand it serves hungry and
homeless people in Washington DC.
Full disclosure.
(04:43):
I am on the board and am thecurrent treasurer.
I do want to thank everyone whohas participated in the
financial quarterback matchingdrive.
I still have not gotten thefinal numbers as to exactly how
much we collected on that, butI'll let you know when I do.
And because you are a donor tothe Father McKenna Center, you
(05:03):
got to go to the front of theline, because that's what I
really have to offer you here.
Not Uncle Frank (05:08):
That and a nickel will get your hot cup a
jack squat.
Mostly Uncle Frank (05:14):
Which is not a bad deal, because we're about
two months behind on the emailsright now.
But getting to your email first, let's talk about these total
international funds and why theyare kind of suboptimal for
diversification purposes, atleast when your main holding is
a US S&P 500 or a total marketfund.
(05:36):
So first, I still think a lotof people have this erroneous
belief that a totalinternational stock market fund
and a total US stock market fundare significantly diversified
and we need to actually look atsome data so we can show you
that that's not true, becausepeople tell stories about this
instead of actually looking atthe data.
(05:57):
And the best way to illustratethis is to go to Morningstar and
to put in your funds each oneof these things and then to go
to the portfolio tab, if youwill, and look at where they
fall in what they call the styleboxes, in terms of whether
they're large or small cap andwhether they are value or growth
(06:20):
based, and what you'll seethere is that a total
international stock market fundlike VXUS is a large cap blend
fund, and then you'll also seethat a S&P 500 or total US stock
market fund is also prettyclose to being a large cap blend
(06:40):
fund.
It leans towards growth andkind of sits on the line between
blend and growth.
So you're talking about twofunds that occupy the same area
of that chart, which meansthey're really not well
diversified.
And you can also look at thecorrelation numbers on those
things and find that they're notvery well diversified either.
(07:03):
That's another way to look atit, but I think this
illustration, using the styleboxes, shows you why.
And then if you look under thehoods of these funds, what you
see is that most of the largeholdings in these funds are
large multinational companiesthat do business all over the
world, like Toyota or TaiwanSemiconductor or Amazon or
(07:25):
NVIDIA, and that really the onlydifference between the total US
fund and the totalinternational fund is the sector
makeup, that all of the bigtech companies happen to be US
companies, except for a couplelike Taiwan Semiconductor.
And if you normalized for that,these funds would look very
(07:46):
similar, with lots of companieslike Ford and Toyota and
Unilever and Procter Gamble andbanks lots of big banks.
So you're really not gettingmuch diversification in terms of
what kinds of businesses are inthese two funds.
So what is the kind ofdiversification you're actually
getting most of when you buy atotal international fund.
(08:07):
What it is mostly is currencydiversification, and so if you
know that the US dollar isincreasing in value against
foreign currencies or decreasingin value against foreign
currencies, you know for certainwhether international stocks
are outperforming orunderperforming domestic stocks,
(08:29):
and if you were to normalizefor that, you would see that
these funds are almost exactlythe same.
So all you're really getting isthis kind of currency
speculation when you're justbuying a total international
fund to go with your total USfund, and maybe that's fine,
maybe that's what you want, butthe better way to speculate on
(08:50):
currencies in a portfolio isactually to buy some gold or
something like that, or managedfutures.
Using your stock allocation tobe speculating on currencies is
not really a good use of yourstock allocation in a
diversified portfolio.
Forget about it, and I'd haveto say this is one of the
biggest foolish consistenciesthat we deal with in DIY
(09:14):
investing.
These kinds of portfolios weredevised almost 20 years ago now,
when the available funds werefew, at least ones that were low
cost and index based, and sothis was probably the best you
could do in, say, 2008 or 2009in terms of constructing a
(09:34):
diversified portfolio, but timedid not sit still.
Financial markets did not sitstill.
Diy investing did not sit still.
And if you still think that isthe best practice, you're wrong.
It's two decades out of dateand so just because somebody
said this nearly 20 years ago asa model portfolio and a great
(09:55):
idea doesn't mean it's the bestthing anymore.
It's like a BlackBerry or a faxmachine.
It's not as bad as a faxmachine, but it's more like a
BlackBerry or a fax machine.
It's not as bad as a faxmachine, but it's more like a
BlackBerry.
It's an obsolete portfolioconstruction because we can do a
lot better.
Today.
We have a lot more funds andwe're going to talk about them
here in a minute.
But it is kind of funny thereactions you get when you
(10:17):
confront people with thisinformation, some of which I
just described to you.
Instead of taking in the newinformation and modifying what
they believe based on newinformation, they frequently
reject it out of hand because itcauses cognitive dissonance.
It causes them to say I don'twant to admit that what I have
(10:39):
been doing is suboptimal, and sowhat they will reach for is
either shibboleths like well,past performance is not
indicative of future results,which is a neutral truism that
doesn't mean anything, becauseit applies to everything.
Not Uncle Frank (10:55):
That is the straight stuff.
Oh funk master.
Mostly Uncle Frank (10:58):
Or well, so-and-so, my idol or my club
that I belong to or affiliatewith and identify myself with as
a part of self identity, youbogleheads.
This is what we do there andthis is all we can do there,
because we'd be out of the clubif we did something different.
So we need to rely on thisfallacy of an appeal to an
(11:22):
authority that is obsolete andout of date.
Anyway, fortunately, remedyingthis thing is not very hard if
you want to hold internationalstocks, because we've got all
this great work from theMerriman Foundation in
particular, who have siftedthrough all of the available
funds for factor diversification, both domestic and
(11:46):
international, and theypublished a best-in-class list
of ETFs that you can look at.
I'll link to in the show notesTo make it really easy to pick
better funds than the totalinternational fund to diversify
a portfolio that is largelyinternational, us total market
or S&P 500.
And what makes the most sensethere is because the S&P 500 and
(12:11):
US total market is in thatlarge cap blend to growth area.
What you really want to have outof your international stocks is
a value-based tilt and asmaller cap tilt, and so there's
a great fund out there calledAVDV that they've reviewed and
recommend.
That makes a whole lot of sensein this context.
(12:33):
It is small cap value ininternational developed markets,
and there are also a couple ofother ones, one that is AVES,
which is value generally inemerging markets, and that is
also an option, and so both ofthose are going to have similar
performances to a totalinternational fund but be more
(12:57):
diversified from the US totalmarket or the S&P 500, and
therefore just a better thing toput in a portfolio with that,
because these kind of fundsweren't around 20 years ago and
I understand why people couldn'thave used them before, but now
that we're in the 2020s and wehave all these better funds
available, there's no reason notto use them, other than wanting
(13:21):
to be foolishly consistent orbe in the club.
Not Uncle Frank (13:25):
Please accept my resignation.
I don't want to belong to anyclub that will accept me as a
member.
Mostly Uncle Frank (13:31):
So if you want to maintain your
international allocation but doit better, the easiest way is
simply to swap out theinternational fund you have now
and use some of these ETFs thatare recommended by the Merriman
Foundation, including AVDV andAVES, and that can also be part
(13:53):
of your value-tilted allocation,because, ultimately, what you
want to have in this portfoliois half of it be tilted towards
growth, like this total marketfund is, and half of it be
tilted towards value, and someof that being small, because
those kinds of portfolios havethe best kind of diversification
(14:14):
properties.
Now, I'm actually very agnosticas to whether you have
international exposure in yourstock holdings or not.
I have a little bit of it inour personal portfolios.
I haven't found that it's madea whole lot of difference, and I
do consider it largely acrapshoot as to whether the US
(14:34):
dollar is going to be strong orweak, and that is going to
determine most of the differencein performance anyway.
So you should just do whateveryou're comfortable with there,
all right.
Now let's talk about this bondfund.
Now you only have 15% allocatedto the total bond fund, and so
having an 85-15 portfolio is agrowth portfolio, and a lot of
(14:58):
people hold those kind of thingswhile they're accumulating,
although you're correct, it'snot optimal for accumulation.
But honestly, whether aportfolio is 90-10 or 100-0 is
almost a coin flip as to whichone's going to do better in, say
, a given decade.
But if you're going totransition it, I probably would
not try to market time it,although you could.
(15:20):
What usually makes the mostsense and feels the best
psychologically is to simplyschedule this and kind of dollar
cost average it over a periodof time so you don't have to
worry about monitoring themarket and just say, well, I'm
going to move 2% every month or3% every month for a period and
that'll get you to where you'regoing in kind of the
(15:43):
psychologically most comfortablemanner, because I realize it's
not very psychologicallycomfortable to just take that
and move it right now wheneverything's at an all-time high
.
Now one thing that's not clearto me is whether you hold those
bonds in a taxable account or aretirement account.
They really do belong in aretirement account because they
(16:03):
generate ordinary income and youdon't want them in a taxable
account because of the taxes.
If you do decide to keep somebonds, for whatever reason, and
are looking for maximumdiversification from your stocks
, I would look at the niceVanguard treasury bond ETFs now,
the little suite of them.
They have that those work verywell as the bond allocation in a
(16:25):
portfolio, and those are VGSHfor the shorter one, vgit for
the intermediate one, whichwould be the most similar to BND
, and then VGLT for thelong-term one.
And I realize you probablydon't need any of those now, but
I thought I would just mentionit, so you had it there.
Not Uncle Frank (16:46):
Yes.
Mostly Uncle Frank (16:48):
And hopefully that all helps and
thank you for your email.
Mostly Mary (16:52):
Frank.
I'd like to thank Robert forhis paragraphs.
They're very nice.
Mostly Uncle Frank (16:57):
Mary, Mary, I need your huggin' Second off,
Second off, we have an emailfrom Jamie.
Oh my gosh, oh my gosh.
Mostly Mary (17:21):
And Jamie writes Frank, I was perusing the DBMF
summary prospectus sent to merecently.
It says effective April 29,2024, the IMGP DBI Managed
Futures Strategy ETF's primarybenchmark changed from the SGCTA
index to the Bloomberg USAggregate Bond Index.
(17:42):
The SGCTA index is now thefund's secondary benchmark.
Huh, why would a managedfutures fund use a bond index as
a benchmark?
Mostly Uncle Frank (17:55):
Thanks, jamie.
Well, jamie, the answer is Ihave no earthly idea as to why
they picked those particularindexes and those particular
orders, why they picked thoseparticular indexes and those
particular orders.
I will tell you that these kindof forms, because they are filed
(18:15):
with the SEC, are fly-speckedendlessly by corporate lawyers,
and so what is in them generallyhas everything to do with what
the lawyers think is the rightthing to report, because these
kind of disclosures aresomething that a fund manager
can get sued over if there'sanything inaccurate or
inappropriate in them.
Personally, I've never reliedon any benchmarks and any
(18:37):
prospecti or prospectuses,simply because they often are
not that accurate in myexperience.
And so the better way toapproach this, at least with
most funds I'm not sure you cando it with a managed futures
fund, but for stock and bondfunds, you go to, like
Morningstar, look at theportfolio construction and see
(18:57):
sort of where does it fall interms of sectors, in terms of
factors, and then you cancompare it with something that's
appropriate in the same factoror sector makeup.
So I guess what I'm saying isdon't worry yourself over it,
because I don't think it reallymatters for any practical
purpose in the end.
Not Uncle Frank (19:18):
Forget about it .
Mostly Uncle Frank (19:21):
What you're really going to be ultimately,
comparing a fund like DBMF to orother funds in the same
category like KMLM or MFUT orCTA and a lot of those are
relatively new, but that's whatI would be looking at.
You certainly would not useDBMF as a substitute for a bond
fund under any circumstances,because it's not a bond fund.
(19:43):
Sorry, I couldn't be of morehelp on that, but thank you for
your email Last off.
Last off, we have an email fromRichard, dr Richard, in fact.
Not Uncle Frank (20:07):
Yes, oh, richard, I'm so happy, hold me.
Mostly Uncle Frank (20:13):
And Dr Richard writes.
Mostly Mary (20:16):
Loved.
Your Trogdor recording Broughtback great memories.
It's still how I draw a dragon.
Not Uncle Frank (20:22):
To begin, draw an S for snake or dragon or
whatever.
Next we'll draw a moredifferent S for the head.
Put a top mark on a long V,then you add some legs.
Draw on a couple of arms Whoa,wait a minute.
(20:44):
I think I need to start over.
This thing doesn't look natural.
Mostly Mary (20:51):
So I've been running through your podcast and
I think I'm in an unusualsituation.
I'm looking at retiring ortaking a bit to reset from a
high-stress, high-income job andI'm moving to the southern
coast of Spain at 39.
Geological arbitrage for thewin.
Not Uncle Frank (21:07):
Yeah, baby, yeah.
Geological arbitrage for thewin.
Yeah, baby, yeah.
Mostly Mary (21:10):
While I can always go back to work if I want to,
I'd hate to leave my current joband have to go back to work
because of money issues, as mycurrent situation took decades
to build up.
I've always been nearly allstocks but have shifted into a
risk parity portfolio.
I personally don't love theidea of leverage but still need
to be a bit more aggressivesince I have a longer timeline,
(21:32):
potentially 60 years.
I did some portfoliooptimization through Portfolio
Visualizer.
However, some friends have saidI'm just curve fitting what's
worked best for the last 50years.
The portfolio I put together, Ithink, carries a lot of your
basic principles 70% stocks, 35%large cap growth, 35% small cap
(21:53):
value, 20% long-term treasuries, 10% gold.
This spits out a 5.7% safewithdrawal rate and a 4.95%
permanent withdrawal rate.
On Monte Carlo simulations, Iactually couldn't find a
five-year period since the 70swhere it went down with a 5%
withdrawal.
It seems aggressive.
(22:14):
Slash safe with the principlesyou discussed of very
non-correlated assets 40 to 70%stocks, higher end as need,
bigger returns, but getting abit nervous as practice sale and
final deadline approaches thatI'm missing something important.
Bit nervous as practice saleand final deadline approaches
that I'm missing somethingimportant.
What do you think of thisportfolio and would you change
(22:36):
anything?
Not Uncle Frank (22:39):
Thanks, again for what you do and feel free to
visit me in Malaga Lease startsin October.
Mostly Uncle Frank (22:46):
Groovy baby.
Not Uncle Frank (22:46):
Well, if you're going to mention Trogdor again,
you're really going to get intoa can of worms here.
Okay, starting again the sameway, s more different S Close it
up real good at the top for hishead and then, using consummate
Vs, give him teeth, spinitiesand angry eyebrows, and you can
add smoke or fire or maybe somewings.
You know, if he's a winglingdragon, let's put one of those
(23:09):
beefy arms back on him for goodmeasure.
That looks really good Comingout of the back of his neck
there.
Now he needs a name.
How about Togdor the Burninator?
Oh yeah, check out all hismajesty.
Mostly Uncle Frank (23:30):
Those little cartoons were some of our kids'
favorite things to look at andrepeat over and over again when
they were growing up, and it'sone of the reasons they're
featured on this podcast.
So there's lots of familynostalgia involved there.
Mostly Mary (23:47):
That's not an improvement.
Congratulations on moving toSpain.
Family nostalgia involved there.
Mostly Uncle Frank (23:49):
That's not an improvement.
Congratulations on moving toSpain.
That's where Mary and I had ourhoneymoon Over 30 years ago, in
fact.
Not Uncle Frank (23:58):
Marriage, marriage, marriage is what
brings us together today.
Mostly Uncle Frank (24:06):
It was a lot less popular then than it is
today.
But now let's tend to yourquestions here.
So you have a portfolio that is35% large cap growth, 35% small
cap value, 20% long-termtreasuries and 10% gold, and
that is a good portfolio thatshould yield about a 5% safe
(24:28):
withdrawal rate over the past100 years or so.
What I would do, in addition towhat you've done already, is
download the toolbox from earlyretirement now, because when
I've run portfolios like this inthere I have got safe
withdrawal rates of about 5%.
It is a little bit difficult touse, in particular putting in
(24:48):
the large cap growth small capvalue variations, because it's
not intuitive the way that works, but hopefully you can figure
it out with the instructions.
Now it is on the moreaggressive end of portfolios in
terms of the stock allocation.
That 70% is usually the upperlimit for good safe withdrawal
rates.
That 70% is usually the upperlimit for good safe withdrawal
(25:10):
rates because they tend todeteriorate when you go higher
than that due to the volatilityof the stocks.
So I would not expect thisthing to perform much
differently than something thatwould say 60% stocks.
It will have higher returns ingood years, but it will be more
volatile in bad years, but itwill be more volatile in bad
(25:32):
years.
Bill Bangan thinks that theoptimal amount of stocks for a
highest safe withdrawal rate aresomewhere between 50 and 60
percent, but other people havedisagreed and the range seems to
be between 40 and 70 percent.
I think the most important partabout that stock allocation,
though, is your division intogrowth and value, because that
really gives you an extra formof diversification that would
(25:53):
not be there if you were usingsimply an S&P 500 fund, for
example.
If you want an illustration ofthat, you can compare what value
funds like a small cap valuefund and a large cap growth fund
did in 2022, because that is avery good example of how
diversified these factorallocations can be, and you do
(26:14):
want to be able to rebalancethose over time against each
other.
Now, I'm assuming you're alsousing variable kind of
withdrawal strategies in termsof the money coming out, and
those can include usingguardrails, for example, where
you would not take out as muchwhen the portfolio was
performing particularly badlyand then would take out more
(26:35):
later, and I would think thatyour personal rate of inflation
would be less than that of theCPI, which is what this is based
on, and both of thosewithdrawal strategies will give
you between 0.5 to 1.2 extrapercent on your safe withdrawal
(26:56):
rate, which essentially acts asa buffer.
I do have to laugh at what yourfriends say.
I'm wondering if any of themare named Sonia.
Mostly Mary (27:06):
My name's Sonia.
I'm going to be showing you thecrystal ball and how to use it,
or how I use it because this isactually not curve fitting.
Mostly Uncle Frank (27:16):
When you're using that lengthy amount of
data and you're only using somebroad asset classes.
It would be curve fitting ifyou had 10 different funds or
things like that that were veryidiosyncratic, because the more
different kinds of things youstick into a portfolio, the more
you're going to have a problemwith curve fitting.
(27:37):
You don't have a problem withcurve fitting when you only have
a few things in the portfolioand you have a very long series
of data, particularly when theasset classes are as broad as
the ones you're talking about.
So in other words, your friendsdon't understand how that part
of it works.
Mostly Mary (27:54):
That's not how it works.
That's not how any of thisworks.
Mostly Uncle Frank (27:58):
And this is why the Fama-French analysis and
factor investing has shown tobe working, at least for these
three-factor and five-factormodels.
It doesn't work for every factorthat somebody ever came up with
, because there are hundreds offactors that academics have
examined, but the ones that weknow and love being small versus
(28:23):
large and growth versus valuedo have meaning and do work
pretty well over very longperiods of time.
The question I always have forpeople who say things like that
is that well, okay, let's justtake your proposed portfolio and
compare it to this one onwhatever metrics you want to
compare it on.
Because that's the issue here.
You're not taking a portfolioand just saying it's this or
(28:47):
nothing.
You are always comparing it toanother portfolio.
And the kinds of portfoliosthat are typically looked at the
simple ones, which are just,say, s&p 500 and bonds, just
don't perform as well as thesemore diversified ones on
basically any metric that youcan apply to them, and you could
(29:08):
say that they are just ascurve-fitted as this one in many
respects because they are largecap tilted.
Mostly Mary (29:16):
You can actually feel the energy from your ball
by just putting your hands inand out.
Mostly Uncle Frank (29:22):
And have other idiosyncrasies.
So what I'm getting at here isthis is another one of these
kind of neutral truisms likepast performance is not
indicative of future results.
When you're just saying thatand saying, well, that applies
to your portfolio, well, itapplies to every portfolio, so
what meaning does it have?
(29:42):
That is not a basis forcomparison between two
portfolios.
Mostly Mary (29:48):
Now you can also use the ball to connect to the
spirit world.
Mostly Uncle Frank (29:52):
Now the rigorous way you would test for
curve fitting is this you wouldtake a segment of data, come up
with a portfolio that performswell in that segment of data and
then take a different segmentof data and run it through that
and see whether the performancesare similar.
You can actually do that withwhat you're doing, since you
(30:12):
have the 50-year set of data.
If you go compare it with the100-year set of data or the
earlier set of data that goesback to the 1920s, you're going
to get similar results.
The reason you're gettingsimilar results is these things
are ultimately based onperformance during particular
economic environments.
The advantage of using somethingthat goes back to 1970 is that
(30:36):
you've covered just about everyeconomic environment you're
likely to have outside ofnuclear war, because you've had
inflationary environments likethe 1970s.
You've had deflationaryenvironments, like the early
2000s, and those are the twoproblem areas.
For decades where the stockmarket performs pretty well,
(30:56):
like the 80s, 90s or 20-teens,you're not going to have any
problem whatsoever almost withany kind of portfolio that has a
lot of stocks in it.
So these casual criticisms yourfriend sonja is leveling upon
you don't hold a lot of waterand don't actually answer the
question as to, well, what kindof portfolio should you hold, if
(31:19):
not the one that you've come upwith, a really big one here,
which is huge.
My suspicions is that sonia isjust afraid to spend money, and
so is projecting her fear uponyou, which I find common in
these quarters, leading topeople having 2.5% safe
(31:39):
withdrawal rates and things likethat.
Mostly Mary (31:41):
That's not an improvement.
Mostly Uncle Frank (31:44):
Anyway, congratulations on your big move
, and I would like to go toMalaga, but it probably won't be
this year, and thank you foryour email.
Not Uncle Frank (31:56):
Trogdor strikes again.
Mostly Uncle Frank (31:59):
But now I see our signal is beginning to
fade.
I'm not sure we're going tohave a podcast this weekend.
We shall see.
Mary and I have about fivenieces and nephews to take care
of and she's already off to workon that issue.
But I will be joining her inthe next couple days.
But in the meantime, if youhave comments or questions for
(32:20):
me, please send them to frank atriskparityradarcom.
That email is frank atriskparityradarcom.
Or you can go to the website,wwwriskparityradiocom, put your
message into the contact formand I'll get it that way.
If you haven't had a chance todo it, please go to your
favorite podcast provider andlike subscribe.
Give me some stars, a follow, areview.
(32:42):
That would be great.
Okay, thank you once again fortuning in.
This is Frank Vasquez with RiskParity Radio, signing off
Trogdor.
Not Uncle Frank (32:56):
Trogdor.
Trogdor was a man.
I mean he was a dragon man.
I mean he was a dragon man.
I mean he was just a dragon,but he was still Tronca, tronca,
(33:24):
burninating the countryside,Burninating the peasants,
burninating all the people inthe thatched roof cottages,
thatched roof cottages, and thetruck door comes in the night.
Mostly Mary (33:52):
And the truck door comes in the night.
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