In this episode we answer emails from Michael, Brian and Ed. We discuss Michael's situation and options as a 34-year old with growing portfolios and a growing family, Brian's questions about the infernal Cederburg paper that won't go away and Ed's questions about accumulation portfolios.
Links:
Father McKenna Center Donation Page: Donate - Father McKenna Center
Testfolio Comparison between Total Market and Large Cap Growth: testfol.io/analysis?s=0GbmPE8D9GK
Merriman Best In Class ETFs: Best-in-Class ETF Recommendations | Merriman Financial Education Foundation
Shannon's Demon Article: Unexpected Returns: Shannon's Demon & the Rebalancing Bonus – Portfolio Charts
Rational Reminder Podcast #350: Episode 350 - Scott Cederburg: A Critical Assessment of Lifecycle Investment Advice — Rational Reminder
An Actually Useful Analysis of Global Portfolios: What Global Withdrawal Rates Teach Us About Ideal Retirement Portfolios – Portfolio Charts
Brian's Golden Butterfly Monte Carlo: Monte Carlo Simulation
Brian's All Equity 50/50 Monte Carlo: Monte Carlo Simulation
Brian's All Equity 34/66 Monte Carlo: Monte Carlo Simulation
Amusing Unedited AI-Bot Summary:
Frank Vasquez tackles the complex world of portfolio construction across different life stages, offering practical wisdom mixed with his trademark humor for investors at all levels. This episode dives deep into a $1 million portfolio review, addressing how to balance real estate investments with securities, manage excess cash, and prepare for eventual retirement.
A key highlight is Frank's thorough debunking of a frequently misunderstood academic study suggesting all-equity portfolios are optimal for retirement. With mathematical clarity, he explains why the study's unusual methodology comparing non-reserve currency bonds to U.S. equities across disconnected historical periods doesn't translate to practical investment advice. His Monte Carlo simulation comparisons confirm that diversified portfolios consistently outperform all-equity approaches during drawdown scenarios.
The episode offers particularly valuable insights on pairing large-cap growth with small-cap value investments – not because either category is predicted to outperform, but because they create effective rebalancing pairs operating on different cycles while delivering similar long-term returns. This mathematical principle, known as Shannon's demon, shows how two assets with comparable returns but different timing can outperform either investment held alone.
For younger investors still accumulating wealth, Frank recommends focusing on equity exposure while avoiding unnecessary complexity. His practical advice extends to managing investments across different account types, structuring 401(k) investments with limited options, and maintaining psychological fortitude through market cycles. Whether you're managing a complex portfolio or just starting you
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Mary and Voices (00:01):
A foolish consistency is the hobgoblin of
little minds, adored by littlestatesmen and philosophers and
divines.
If a man does not keep pacewith his companions, perhaps it
is because he hears a differentdrummer.
A different drummer.
And now, coming to you fromdead center on your dial,
(00:22):
welcome to Risk Parity Radio,where we explore alternatives
and asset allocations for thedo-it-yourself investor,
Broadcasting to you now from thecomfort 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.
Voices (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.
Mary and Voices (01:26):
Top drawer, really top drawer.
Mostly Uncle Frank (01:31):
Along with a host named after a hot dog.
Voices (01:34):
Lighten up Francis.
Mostly Uncle Frank (01:37):
But now onward to episode 411.
Today, on Risk Parody Radio,we're just going to do what we
do best here.
Looks like you've been missinga lot of work lately I wouldn't
say I've been missing it, bobwhich is attend to your emails,
and so, without further ado,here I go once again with the
email.
And First off.
(02:00):
First off, we have an emailfrom Michael Hee.
Hee and Michael writes.
Mary and Voices (02:09):
Dear Uncle Frank, first thank you for the
opportunity to pay a noble bribevia the Father McKenna Center.
My donation receipt is belowyes.
Just a pleasure to listen to apodcast by someone doing
something they enjoy their way,with no ads nor pretension.
I come to learn and I stay forthe drops.
Voices (02:28):
Bow to your sensei.
Bow to your sensei.
Mary and Voices (02:31):
I finally caught up on all your podcasts
and while I have been followingMarkets since I was a teenager,
I didn't realize untildiscovering your podcast via the
Bogleheads forum that I onlyknew just enough to be dangerous
.
You have given me a holisticnarrative framework through
(02:58):
which to think about somepersonal investing that I am now
trying to put into practice atthe age of 34.
Wish I knew sooner, but betterlate than never.
I have a few questions.
Apologies for the worriness,Aunt Mary.
Voices (03:11):
Mary, Mary, why you bugging?
Mary and Voices (03:15):
And would welcome your consulting service
as well, if still on offer.
I am in the accumulation phasewith a wife and small children.
Voices (03:23):
I don't care about the children, I just care about
their parents' money.
Mary and Voices (03:27):
I have an approximately $1 million
portfolio which I hope to growvia a relatively high earning
career over the next 15 to 20years, with the hopes of
transitioning to part-time workand living off a modified golden
ratio portfolio until socialsecurity kicks in.
Modified golden ratio portfoliountil social security kicks in.
(03:50):
Portfolio breakdownApproximately 31% real estate,
equity and rental properties,excluding primary residence.
I count this here because Ihope to sell these one day and
convert into securities, but ifnot, we'll remove and count the
income against my fire incomegoal.
Approximately 16% cash securityand for opportunistic
investments Approximately 7%private securities.
(04:11):
Approximately 4.5% T401K-likeprivate company ESOP, which
should grow nicely over time,and approximately 2.5% VC fund
playing around.
Voices (04:24):
Cool approximately 2.5%.
Mary and Voices (04:25):
VC fund playing around 0.5% physical gold and
silver plus some crypto,approximately 45.5% in public
securities where I focusaccumulation Approximately 2% in
play money my wife likespicking stocks and thematic
funds in her play account wifelikes picking stocks and
(05:12):
thematic funds in her play.
Taxable brokerage 25% each toSCHG, avuv, brkb, vxus.
Should I swap SCHG for VOO orVTI?
Considering swapping VXS forDFIV and DISV, with five
securities at 20% each,increasing XUS weighting
Approximately 15%.
(05:33):
401k approximately 8% T401k.
25% each to SWTSX, sx, dfsv,ixus, avdv.
(05:54):
Considering swapping SWTSX forSWLGX, ixus for EVF and adding
AVES with five securities at 20%each, increasing XUS weighting
Approximately 7%.
R40, 401k.
80%.
20%.
Fxaix, fspsx.
Considering mirroring T401k ifI make the changes noted,
approximately 17.5% are acrosstwo Roth IRAs and HSA.
(06:17):
80% FZROX, 20% FZILX.
Considering mirroring T401k ifI make the changes noted 20%
each FSPGX or FZROX, dfsv, efv,avdv, aves.
Approximately 5% in three 529s.
(06:41):
Using the Vanguard target date2041 portfolio.
We'll look to use whatever isleft after college in
approximately 17 to 21 years tofund my kids' Roth IRAs.
So currently approximately 70%US stocks, approximately 28%
ex-US stocks and approximately2% bonds and liquid alternatives
.
Key questions I'm conflictedbetween LCG and USTSM, assuming
(07:07):
growth is due to underperform asit has begun to this year.
Cue crystal ball sound.
Drop Crystal ball can help you.
It can guide you.
I'm leaning towards increasingex-US allocation, given I do not
have any gold or otheralternatives to hedge the US
dollar market and, assuming theUS is due to underperform, as it
(07:29):
has also begun to this year,cue the crystal ball drop again.
As you can see, I've gotseveral here, a really big one
here, which is huge.
Note I added gold to myportfolio after starting your
podcast from the beginning, thenremoved it after making it
through some episodes andunderstanding it is not
(07:51):
necessary during theaccumulation.
So I missed this year's run upand I am a bit neurotic, as you
can see.
Voices (07:57):
You are talking about the nonsensical ravings of a
lunatic mind.
Mary and Voices (08:03):
I am maxing out tax-advantaged accounts and
saving regularly into taxableand throwing in excess bonus
there as well, so understandthat the deposits here will have
more impact over the long termthan the fund choices.
But should I consider doinganything differently?
Should I consider alternativeassets at this stage or even a
small allocation to LTT in myprimary accounts?
(08:24):
I also question if I have theright temperament to hold SCV,
given it sometimes takes about15 to 20 years for the premium
to show up and assuming LCV ismore likely to express the value
factor premium in a passiveinvesting world where larger
market cap companies draw in themost dollars.
I don't know, you don't know,nobody knows.
Voices (08:45):
Does that make you different than most everybody
dollars?
I don't know, you don't know,nobody knows.
Does that make you differentthan most everybody else?
The answer is yes.
Somebody says well, why is that?
We don't know, what do we knowyou?
Mary and Voices (08:58):
don't know, I don't know, nobody knows.
I further question if valuefunds can even appropriately
calculate value for moderncompanies where spending on
intangible assets isn't capturedin the book value.
Just trying to get an approachthat I can stick to for about 15
to 20 years and stop agonizingand tweaking, but very concerned
about another lost decade in USstocks or if I'm missing
(09:19):
something key.
Voices (09:21):
You're insane gold member.
Mary and Voices (09:25):
Lastly, what do you think about this modified
golden ratio portfolio?
Voices (09:30):
Mary, Mary, I need your huggin'.
Mostly Uncle Frank (09:39):
Well, first off, thank you for being a donor
to the Father McKenna Center.
Voices (09:46):
We few, we happy few, we band of brothers.
Mostly Uncle Frank (09:54):
As most of you know, we do not have any
sponsors on this program, but wedo have a charity we support.
It's called the Father McKennaCenter and it supports hungry
and homeless people inWashington DC.
Full disclosure I am in theboard of the charity and am the
current treasurer, but if yougive to the charity, you get to
(10:15):
go to the front of the emailline.
Voices (10:18):
Groovy baby.
Mostly Uncle Frank (10:20):
And there are two ways to do that.
You can give directly, asMichael has done here at the
Father McKenna website, and Iwill put that donation page in
the show notes.
Or you can join us as one ofour patrons on Patreon, which
you can do through the supportpage at wwwriskparadisecom.
And either way you can go tothe front of the email line with
(10:43):
that.
Just make sure you mention itin your email so I can duly move
it up, as it were.
And the line is about twomonths long now, so it is worth
something I should think.
Voices (10:57):
That's gold, jerry gold.
Mostly Uncle Frank (11:00):
But now getting to your email, so I see
you're at the age of 34.
You're still quite young andstill have a ways to go in terms
of earning money and investingmoney.
Your situation is actually verysimilar to our eldest son, who
is not quite 30, but is also onthis same track and also has
(11:21):
some real estate, since hefollowed the formula in Set for
Life by Scott Trench, which isan excellent book for people in
their 20s, and so he's ended upwith a rental property that is
appreciated in valuesubstantially in addition to the
current house he's living in,which is also house hacking.
Once you have a family, househacking is probably not for you,
(11:42):
at least if it's only onedwelling, forget about it.
So just some generalobservations first.
First, you should consider yoursituation as you sitting on a
giant pile of future cash thatyou have not invested yet, which
means that although yourinvestments are substantial
(12:03):
right now, they are notsubstantial when you compare it
to all of the investments you'relikely to make in the future,
which means you can take a lotof risk and should be
essentially 100% equities inmost of your invested assets.
So the real estate is great ifit's rental real estate and if
(12:24):
it is producing positive cashflows.
That is really the key here,and that's, after all, of your
expenses.
I would just make sure it's nottaking up too much of your time
, because your time is probablybetter spent earning more money
if you're in a high-earningcareer and spending it with your
wife and children.
Voices (12:43):
Why?
What have children ever donefor me?
Mostly Uncle Frank (12:47):
Real estate makes actually the most sense
for people who are in loweryielding careers and have more
time.
But as long as you're enjoyingthat, just keep with it and it
will be an excellent thing tohave long term.
All right.
It says you also have 16% incash.
That is probably too much cash,because if you have a
(13:07):
million-dollar portfolio, youhave $160,000 in cash.
Now I realize that you willneed some of that to support the
real estate, obviously, becauseyou have to be in a position to
pay for repairs and deal withvacancies and things like that.
But above and beyond that andwhatever you need in terms of an
emergency fund, generally,having just big piles of cash
(13:30):
sloshing around is not ideal,unless you have a specific thing
you were planning to spend iton in the next few years.
Here, what may work better foryou is what our eldest son does
with his extra money essentially, which is to create an
intermediate term portfolio thatis essentially a retirement
(13:51):
portfolio.
So it looks like a risk paritystyle portfolio.
In fact, he uses a variation ofthe golden ratio, and so he's
got his long-term assets inretirement accounts, et cetera,
which are essentially 100%equities, his short-term assets
in retirement accounts, etc.
Which are essentially 100%equities, his short-term stuff,
which is enough cash to supporthis real estate, and a small
(14:11):
emergency fund.
He really doesn't need much,because he doesn't have a wife
and children like you do.
Voices (14:16):
All we need to do is get your confidence back so you can
make me more money.
Mostly Uncle Frank (14:22):
But then the rest of this goes in an
intermediate kind of portfoliothat is allocated something like
a golden ratio.
The reason something like thatworks as long as you have, say,
three years of possibility isbecause those kinds of
portfolios tend only to be downthree or four years max.
(14:42):
So it can be used as this kindof intermediate accumulation
portfolio.
And so the last thing he usedit for was to buy some solar
panels for one of his houses,and if he needs to buy a
replacement car he can just buyit out of that.
But if you have something likethat, then you are not stuck
with just big piles of cash thataren't yielding very much.
(15:04):
So basically, the way hisfinances work is fills up all
the retirement accounts,accumulates the cash in the
checking account and emergencyfund type thing and then, as
that money kind of overflows orbuilds up, it then goes into
this intermediate account whichis then invested in this golden
ratio kind of portfolio.
(15:25):
All right, the 7% in privatesecurities.
Yeah, you have an ESOP.
That's great.
Take advantage of that.
It is what it is and it goeswith the job, so take it with
the job as part of yourcompensation.
Voices (15:39):
I don't think I'd like another job.
Mostly Uncle Frank (15:42):
The 2.5% in a venture capital fund yes,
think I'd like another job.
The 2.5% in a venture capitalfund yes, that is playing around
, so that's a small amount youcan play around with, so it's no
big deal.
0.5% physical gold and silverplus some crypto Again, that is
playing around money.
As far as I'm concerned, makesure you don't actually lose
your physical metals, or makesure you also keep them in a
(16:02):
safe place and do not advertisethat you have them, lest you
become a target for burglars ordisreputable cousins or somebody
else who might want to take itwhat jimmy really loved to do.
Voices (16:16):
What he really loved to do was steal.
I mean, he actually enjoyed it.
Jimmy was the kind of guy whorooted for the bad guys in the
movies.
Mostly Uncle Frank (16:25):
It looks like the rest of it.
You have some playing aroundmoney.
Looks like you're experimentingwith a return-stacked kind of
portfolio involving someleverage.
That's fine too, as long as itdoesn't get too large.
Voices (16:40):
You have a gambling problem.
Mostly Uncle Frank (16:43):
And then most of your money looks like
it's invested in a variety ofindex funds, which is where it
really belongs on your timeframe, although I would get rid
of this target date fund if youwant to know why.
Voices (16:58):
Go listen to episode 333 .
Mostly Uncle Frank (17:01):
Forget about it.
I would just put that all instocks, at least for the next
decade, and then think about itafter you kids get to high
school around there.
Okay, looking at your specificquestions, you say you're
conflicted between large capgrowth and US total stock market
.
Well, I wouldn't be conflictedby that.
Those are questions 99%correlated for the most part, so
(17:22):
it's kind of six of one, half adozen the other.
This is one of these kinds ofquestions that seems important
but it's not really important.
And whenever you are thinkingabout two different assets, one
of the things you should dofirst is go to a correlation
analyzer.
The one at Testfolio isactually the easiest one to use
now.
It's better than the one atPortfolio Visualizer, I think.
(17:43):
So go there to the AssetAnalyzer and you can see
comparative performances andcorrelations.
And when you have things thatare that highly correlated,
there isn't really a significantdifference between the two of
them.
The reason that you would holdlarge cap growth has more to do
with what else is in yourportfolio, because if you are
(18:06):
just holding one thing, youwould probably just hold the
total stock market.
But if you're going to hold avariety of things across
different asset classes, thenyou want some of that large cap
growth as one of thoseallocations.
Your reaction to it going downthis year and large cap growth
has underperformed If you lookat the MAG-7, it's down like 20%
(18:29):
and the rest of the S&P 500 isessentially flat.
But that's a good thing in yourcircumstance, because of your
time frame and that's what youreally need to be thinking about
.
You actually want to havethings that crash in the near
term so that you can buy more ofthem or rebalance into them,
like you would have done in 2022, when large cap growth was down
(18:51):
30 to 40 percent and valuestocks were down zero to 10
percent or even up.
That was a rebalancingopportunity, or an opportunity
to focus more on the large capgrowth and buy more of it.
You are actually hoping thatsomething like that happens.
If you are investing in largecap growth and you are hoping
that it happens in the nextdecade, because after another
(19:15):
decade, then you will bethinking about moving to more
conservative allocations.
So, as large cap growth isgoing down right now, I would be
inclined to be buying more ofit, not less of it.
All right, your next questionwas leaning towards increasing
the international allocation,given you do not have gold or
other alternatives to hedge theUS dollar slash markets.
(19:37):
Well, I think that's fine.
Just pick something and stickwith it that you don't want to
be jumping in and out ofinternational stocks or funds.
So if you are going to committo a certain amount of
allocation to that, make surethat's a long-term commitment
and that you are continuing toinvest in it when it
underperforms and thenrebalancing out of it when it
(20:00):
overperforms.
It's just like anything else.
It just adds a level ofcomplication, but it doesn't
seem like that bothers you.
In fact, it seems like youenjoy a little complication here
.
So this may be exactly for you.
To incorporate some of theseinternational funds.
I would use those onesrecommended by Paul Merriman
(20:21):
that are mostly the Avantis andDFA funds.
I think they're just betterformulated and better positioned
and easier to use as part of aoverall portfolio, especially if
you are pairing a US large capgrowth in with an international
value fund.
I don't think you really needanything, though, to hedge your
portfolio in any way, shape orform, simply because you have
(20:44):
such a long time frame thatyou're dealing with that.
The time is the hedge and youshould not be thinking about
trying to reduce volatility atthis point with hedges of any
kind, and that's why it probablydoesn't make sense for you to
be using an alternative likegold in your portfolio right now
, except for that intermediateportfolio we talked about before
(21:06):
, because you do not expect goldto outperform stocks over long
periods of time, like 15 to 20years.
It can and it will over shortperiods of time, but that
doesn't always happen that way.
Voices (21:18):
I love gold.
Mostly Uncle Frank (21:22):
Usually you would expect it to perform
somewhere between bonds andstocks overall over long periods
of time, and its key attributethat makes it useful in a
portfolio is that it'sdiversified from both stocks and
bonds.
But that's not of that much useto you when you're in an
accumulation phase.
To you when you're in anaccumulation phase and I think
(21:45):
that gets some into your finalquestion that, no, you don't
need bonds or other alternativesright now if you really don't
want them.
The reason that you would holdsomething like those things is
wanting to sleep well at night,because there are people that
like to accumulate in a riskparity style portfolio simply
because they don't like thevolatility of a regular
accumulation portfolio.
(22:05):
You do not seem to be one ofthose people.
Mary and Voices (22:08):
I think I've improved on your methods a bit
too.
Mostly Uncle Frank (22:11):
And, in any event, you do have this
substantial allocation to realestate as well.
You also ask some questionsabout value generally and small
cap value.
Voices (22:20):
I'm telling you, fellas, you're going to want that
cowbell.
Mostly Uncle Frank (22:24):
What you should recognize is that when
your large cap growth stocks arefalling, they are likely to
fall much more than your valuestocks.
And so if you get another year,like 2022 or the years between
2000 and 2003, those valuestocks will give you an
(22:45):
opportunity to rebalance intothe growth stocks which have
fallen substantially.
And that's the reason you holdthe two of those things together
, because they tend to work wellin rebalancing scenarios.
And now, if you look at a stylebox chart, like you see at
Morningstar, looks like thattic-tac-toe board with size from
(23:08):
small to large going on thevertical axis and then value
versus growth on the horizontalaxis.
If you look at that upper leftcorner the large cap value box,
left corner, the large cap valuebox that box, we know pretty
well, is going to have overalllower returns and lower
(23:30):
volatility.
So it's generally not somethingyou want when you are
accumulating, unless you arejust looking for lower
volatility for some reason.
But think about that.
If you take that box out of thetotal, what you have left then
is going to be the rest of themarket, which is going to be
higher volatility and higherpotential returns than what is
(23:52):
in that large cap value box.
And so the question then iswell, what do you pick out of
everything else in those boxes?
We know that small cap growth isextremely volatile, and its
volatility probably outweighsits value in terms of
performance.
So the best two things that tendto offer performance versus
(24:15):
volatility tend to be in thatupper right hand corner box,
which is large cap growth, andthe lower left hand corner box,
which is small cap value growth,and the lower left hand corner
box, which is small cap value,and those two things tend to
work together pretty well.
So I would actually not holdsmall cap value because you
think it's going to outperformeverything else in the market.
(24:36):
All you really care about andall you really need is something
that performs equally well butat different times than
something like large cap growth.
That is the lesson of Shannon'sdemon, which is the math behind
modern portfolio theory that ifyou have two things that
perform about the same but theyperform differently at different
(24:58):
times, holding both of themtogether will outperform either
one of them alone because ofthis rebalancing possibility,
and that's just math.
And that's why you should beholding value stocks with your
growth stocks, not because youthink that there's crystal balls
or there's going to be magicaloutperformances or other things
(25:19):
like that.
Mary and Voices (25:22):
Now you can also use the bull to connect to
the spirit world.
Mostly Uncle Frank (25:26):
But if you do happen to have a lost decade,
like the 1970s or the early2000s, you will be very happy to
be holding any kinds of valuestocks, whether they be small,
large, international or whatever, because they will greatly
outperform the growth stockswhich are going to be dragging
the rest of the market down inthose circumstances.
(25:47):
All right, your last questionwhat do I think about this
modified golden ratio portfolio?
And I did not make Mary readall of these 16 funds that you
stuck in it.
I think it's probably overlycomplicated, but it looks fine
(26:13):
in terms of its overall macroallocations.
I mean, just remember that thepurpose of this kind of a
portfolio is for drawing down.
On that, she'll hopefully havea high, safe withdrawal rate,
and so that's what you should bethinking of.
And there are some generalcriteria that we know work
pretty well, and you seem tohave matched all the criteria
(26:35):
here.
I'm just going through thosecriteria.
The first two come from BillBengen.
One is to keep your equitiessomewhere between about 40% and
70% of the total portfolio, andyou've done that here.
Looks like you have around 50%in what you've got listed here.
The second criteria from BillBengen is to keep your cash
(26:57):
holdings at 10% or less of theportfolio, and I would say
you've done that because youhave very little to no cash in
this sample portfolio you'veconstructed.
The third thing is to splityour stocks between growth and
value for the reasons we've beendiscussing, because they make
good rebalancing pairs, and itlooks like you've done that too.
(27:18):
And then the fourth thing wouldbe to have somewhere between 20
and 30 percent in treasurybonds, and it looks like you've
got some strips in here andyou've thrown a little preferred
shares in there.
I'm not sure you actually needthose in this kind of portfolio,
but it's not wrong to have somerecognized there.
Do not perform so much liketreasury bonds, but they make
(27:40):
sense.
If you have a bond like thingyou need to put in a taxable
account because they payqualified dividends.
And then finally, you want tohave between 10 and 25 percent
in alternative assets and youhave 16 percent in gold in this
portfolio and about 6 percent inmanaged futures, and so that
also fulfills that requirementor guideline also fulfills that
(28:03):
requirement or guideline.
So what you've constructed herelooks like it works fine.
Maybe you could try this out asyour intermediate portfolio and
see how it runs, although I'mnot sure you really want to
manage 16 funds and you reallydon't need that many funds to do
something like this.
But you can if you like.
Voices (28:23):
Hearts and kidneys are tinker toys.
Mostly Uncle Frank (28:26):
So hopefully all of that helps.
Thank you for your support ofthe Father McKenna Center and
thank you for your email.
Put me in a state, a state ofshock.
We're doing it.
Voices (28:45):
Come on, baby.
She put me Woo it's.
Mostly Uncle Frank (28:57):
Daddy's Talk .
Second off, we have an emailfrom Brian.
Voices (29:02):
Hey, Brian, care to place a wager?
Mostly Uncle Frank (29:05):
And Brian writes.
Mary and Voices (29:07):
Hi Frank, thanks to you and Mary and all
the good work, I've made a smalldonation to the Father McKenna
Center.
I'm a DIY investor currentlyusing a stock golden butterfly
allocation.
After listening to RationalReminder, episode 350, I became
curious about an all-equityapproach, especially in light of
the Cederberg et al paper.
(29:27):
Beyond the Status Quo, theauthors conclude that for
investors with access tointernational equities and no
leverage, an all-equityportfolio is optimal through
retirement, with no meaningfulbenefit to holding bonds.
Voices (29:41):
That's not how it works.
That's not how any of thisworks.
Mary and Voices (29:46):
Out of curiosity, I compared the golden
butterfly with a couple ofall-equity 50-50 and 33-67
portfolios.
Using Monte Carlo simulationsand a 5% withdrawal rate.
The golden butterfly showedmeaningfully better outcomes at
the 10th and 25th percentiles.
I'm wondering am I missingsomething?
I'd love to hear your thoughts.
(30:06):
Best regards, brian.
Yeah, you got money to pay forfake mustaches.
Voices (30:11):
Huh yeah, how much you pay for that fake mustache?
$2.99.
Ah Ow.
Mostly Uncle Frank (30:18):
Ah Well, I need to also thank you too,
Brian, for being a donor to theFather McKenna Center, and that
is why your email has also beenmoved to the front of the email
queue here.
But now, getting to your email,I see you have stumbled on this
Cedarburg paper, which I don'tknow why the guys at Rational
(30:40):
Reminder are so enamored withthis, because it does not mean
what you think it means.
Voices (30:46):
Inconceivable.
Mostly Uncle Frank (30:48):
And they are really honestly doing
themselves a disservice byfixating on this.
I guess there's a new versionof it out now, but I really
think it's damaging theircredibility at this point as
financial advisors, and we'lltalk about why in a second here.
But we've already talked aboutthis paper over and over again
and linked to a number ofcriticisms of it in its various
(31:12):
guises and forms, and thoseepisodes are episodes 307, 319,
320, 320, 323, 341, 388, and 406.
(31:33):
And it actually has myriadproblems.
But the biggest problem is howthis has been presented by PWL
Capital and others as sayingthat a 100% stock portfolio is
going to outperform a portfoliowith bonds in it, because that
is not actually what this studysays.
And if you think that's whatthis study says, you are under a
misimpression or have beenmisled by somebody.
Voices (31:55):
Oh no my young Jedi, you will find that it is you who
are mistaken about a great manythings.
Mostly Uncle Frank (32:12):
So you need to appreciate what is actually
being compared here.
This is a very strange modelthey are using for this academic
study.
What they've done is they'vetaken 10-year segments from a
variety of countries.
I think it's like 30-some.
So let's just pick a country,say France.
Voices (32:34):
You don't fight an ass English pig dogs.
Don't fight the nice Englishpig dogs.
Mostly Uncle Frank (32:38):
So what they are comparing there on one side
is a portfolio that has onlyFrench bonds in it as its bonds
and the French equivalent ofT-bills and then some stocks.
That is one portfolio that isgenerally about a third in
(33:03):
French stocks and then the restof that in what is international
stocks from the Frenchperspective, which is mostly US
stocks, because the US market isthe largest.
So when it says internationalin that comparison it is
(33:28):
actually in most cases talkingabout a majority in US equities.
And then they take a wholeseries of those 10-year segments
and jumble them up.
So you're in France one decade,then the next decade you're in
Germany, then the next decadeyou're in Sweden, then the next
decade you're in the US.
Obviously nobody actuallyinvests that way, so this is
only of academic interest, butat its fundamental basis it is
(33:49):
essentially comparing in mostcircumstances the bonds of a
country that is a non-reservedcurrency country at the time, in
particular like Francehistorically and the US equity
market.
So, as you can imagine, in mostcircumstances owning bonds in
some country that could be warravaged or have some other
(34:12):
problems historically to the USequity market, the US equity
market's always going to win.
And because that is the majorcomponent of these total stock
market allocations and whatthey're comparing it to.
That is why the 100% equityportfolio looks so good.
It's not because of theequities, it's because of the
(34:34):
bonds that they're using tocompare with the equities, which
in most cases are bonds innon-reserved currencies, some of
which are highly speculative inthese circumstances.
So since nobody actuallyinvests that way and nobody
would recommend that somebodyinvests that way, this study is
only of really academic interestand that is why, when you put
(34:56):
in the links that you comparedthe golden butterfly into just
regular portfolios that peoplewould actually be investing in,
you see that the morediversified portfolio does
outperform the all equityportfolios in drawdown scenarios
and nothing in that study haschanged that fact.
Voices (35:16):
That's the fact, Jack.
That's the fact, Jack.
Change that fact.
Mostly Uncle Frank (35:21):
So when you say, am I missing something?
The only thing you're missingis that you've been misled about
what you think that study means.
And unless you've read it, andreally thought about it, you
will not get a correctimpression of the limitations of
it.
If you want to look atsomething that's much more
(35:42):
interesting in terms of globalportfolios involving various
countries over time, tyler overat Portfolio Charts did an
excellent study last yearlooking at a variety of
different countries anddifferent portfolios in those
countries involving domesticequities, what would be
international equities for eachcountry, domestic and
(36:04):
international bonds and gold,and you'll see some interesting
results there.
I'll link to that in the shownotes.
We've linked to it before, butthat would be a much more
interesting and useful thing tobe looking at than this
Cederberg study.
Forget about it and that's aboutall I have to say about it.
(36:24):
I'm sorry.
You've been misled whetheryou've been misled by that
rational reminder podcast oranother and it's really out of
character for those guys becausethey usually don't do that, but
in this case they've reallygotten wound up on this one
study and methodology.
That doesn't, frankly, make awhole lot of sense given the
business that they're in,because I don't think that they
are recommending that theirclients adopt these kinds of
(36:47):
portfolios.
But everyone makes mistakes andI hope they stop making this
one soon enough.
Voices (36:55):
Here to reply to a recent editorial is Miss Emily
Lytella.
Here to reply to a recenteditorial is Ms Emily Lytela.
I'm here tonight to speak outagainst busting schoolchildren.
Busting schoolchildren is aterrible, terrible thing.
I hear this is going on allover the country.
(37:16):
The food in jail isn't good,and even though they get bread,
I don't believe they can gettoast or nice cake.
Now, who will tuck them in?
Where will they hang theirleggings?
Where will they set up theirlittle lemonade stands?
(37:38):
No, they don't have toys injail, except maybe tiny tears
dolls.
And did you know?
They have little holes in theirbottoms there, the tiny tears
and you can get.
Where will they put their toysaway?
Excuse me, If they have toys.
Mary and Voices (37:54):
Miss Vitella.
Yes, I'm sorry, the editorialwas on busing schoolchildren B.
Voices (37:58):
Yes, I'm sorry, the editorial was on busing school
children Bussing, bussing, ohNot busting, I'm sorry, never
mind.
Mostly Uncle Frank (38:08):
Hopefully that helps and thank you for
your email.
Voices (38:12):
So, brian, we're even now right Ready to start a new
life in England.
I've got my money.
Your wounds have healed upnicely.
What do you say?
We let bygones be bygones.
Hmm, you shot me in both myknees then lit me on fire.
All right, all right, I tellyou what you get one free
revenge shot at me, okay, butI'm not going to tell you when
it's coming.
(38:36):
Ah, this is going to be fun.
Last off.
Last off.
Mostly Uncle Frank (38:41):
Last off of an email from Ed.
Hello, I'm Mr Ed, and Ed writes.
Mary and Voices (38:52):
Hi Frank, I enjoy your show, both for the
entertainment value and adviceyou never know what you're going
to get.
We are in our 40s and havesaved to our retirement plans at
work and also have a brokerageaccount.
We have about 20 years or soleft before our decumulation
phase, when we will have agolden ratio or golden butterfly
(39:12):
type portfolio.
What are your thoughts for ouraccumulation phase portfolio now
, so that the eventualtransition will be easy?
Our 401ks have limited options,mainly index funds and target
date funds.
Thanks, ed.
Voices (39:28):
Market drops five points , I'm glad my money's tied up in
hay.
Mostly Uncle Frank (39:34):
Well, thank you for your email, ed.
Yes, I think, since you're stilltwo decades from retirement,
you should just stick with indexfunds, and which ones you use
is almost not that important,particularly if it's in a 401k
and you can make transactionsanytime you want without paying
(39:56):
any taxes, including when youget towards retirement anytime
you want without paying anytaxes, including when you get
towards retirement.
So you could just do it in atotal stock market fund or add
any number of other things.
Like our first emailer today,what I like to use is something
that is half large cap growth,or a total stock market fund or
an S&P 500 fund, and pair thatwith something in the small cap
value category.
(40:16):
But if you don't have thosethings, you don't.
And pair that with something inthe small cap value category.
But if you don't have thosethings, you don't have those
things.
I would avoid small cap growthfunds and things that are
allocated to small cap growth.
Other than that, I'd be moresensitive to the fees being
charged by these funds thananything else.
Do not use target date funds.
Voices (40:38):
Not going to do it Wouldn't be prudent at this
juncture.
Mostly Uncle Frank (40:41):
If you want to know why, go listen to
episode 333.
They will only slow down youraccumulation.
Voices (40:49):
You're going to end up eating a steady diet of
government cheese and living ina van down by the river.
Mostly Uncle Frank (40:58):
Now, if most of your money is in 401ks, your
transition will be relativelyeasy, simply because you're just
going to move it to an IRA andmake the transactions you need
and then have the kind ofportfolio that you want.
If you have money accumulatingin taxable accounts, I would
focus those on all equities, andif you were wanting to add
(41:21):
small cap value to yourportfolio, oftentimes that's a
good place to put it,particularly if you don't have
that available in your 401k.
Now you can also have IRAs andput different index funds in
those to match whatever you haveavailable in your 401k.
So what a lot of people end updoing is they have, like an S&P
(41:41):
500 fund in their 401k becauseit's cheap, and then they use
their other accounts to add ineither international funds or
small cap value funds orwhatever else they want for
their accumulation, and then,when you get to your transition
phase, you do most of yourtransactions in the retirement
accounts to avoid any taxationat that point in time.
(42:03):
Now I realize you're not abeginning investor, but you
might be interested in listeningto the advice to beginning
investors which is in episode208.
It's on a Wizard of Oz theme.
Voices (42:18):
What kind of a horse is that?
I've never seen a horse likethat before now and never will
again.
I fancy there's only one ofthem and he's it.
Mostly Uncle Frank (42:26):
These are yours, of a different color
you've had tell about but Ireally think that most people
can successfully accumulate withbetween one and four index
funds and it doesn't need to beany more complicated than that.
The main key is to just pick aformulation and then just stick
(42:46):
with it and not be jumpingaround from fund to fund,
because that's really howamateurs underperform.
They look and see somethingthat's performed well in the
last one to ten years andallocate to that or primarily to
that, and then it underperformsand then they jump to a
different fund and then thatunderperforms and they jump to a
different fund, in which casewhat they're essentially doing
(43:09):
is buying high and selling low.
You want to avoid that by justpicking some reasonable
allocation to a few funds andjust sticking with them, or just
adding other funds later on asyou accumulate more money.
At the beginning, just havingone fund is just fine, as long
as it's a low cost index fund.
(43:30):
So hopefully that helps andthank you for your email.
Voices (43:36):
A horse is a horse, of course, of course, and this one
will talk to his voice, hishorse.
You never heard of a talkinghorse.
Well, listen to this.
Mostly Uncle Frank (43:47):
I am Mr Ed, but now I see our signal is
beginning to fade.
If you have comments orquestions for me, please send
them tofrankatriskparityradarcom.
That email isfrankatriskparityradarcom.
Or you can go to the website,wwwriskparityradarcom.
(44:09):
Put your message into thecontact form and 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.
That would be great.
Okay, thank you once again fortuning in.
This is Frank Vasquez with RiskParty Radio Signing off.
Voices (44:39):
Thanks for listening.
And the wind screams.
Will the wind ever remember thenames it has blown in the past?
But with its crutch, its oldage and its wisdom, it whispers
(45:04):
no, this will be the last.
Mary and Voices (45:51):
And away cries Mary.
Thank you very much.
Please consult with your ownadvisors before taking any
actions based on any informationyou have heard here, making
sure to take into account yourown personal circumstances.
A foolish consistency is the hobgoblin of
little minds, adored by littlestatesmen and philosophers and
divines.
If a man does not keep pacewith his companions, perhaps it
is because he hears a differentdrummer.
A different drummer.
And now, coming to you fromdead center on your dial,
(00:22):
welcome to Risk Parity Radio,where we explore alternatives
and asset allocations for thedo-it-yourself investor,
Broadcasting to you now from thecomfort 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.
Voices (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.
Mary and Voices (01:26):
Top drawer, really top drawer.
Mostly Uncle Frank (01:31):
Along with a host named after a hot dog.
Voices (01:34):
Lighten up Francis.
Mostly Uncle Frank (01:37):
But now onward to episode 411.
Today, on Risk Parody Radio,we're just going to do what we
do best here.
Looks like you've been missinga lot of work lately I wouldn't
say I've been missing it, bobwhich is attend to your emails,
and so, without further ado,here I go once again with the
email.
And First off.
(02:00):
First off, we have an emailfrom Michael Hee.
Hee and Michael writes.
Mary and Voices (02:09):
Dear Uncle Frank, first thank you for the
opportunity to pay a noble bribevia the Father McKenna Center.
My donation receipt is belowyes.
Just a pleasure to listen to apodcast by someone doing
something they enjoy their way,with no ads nor pretension.
I come to learn and I stay forthe drops.
Voices (02:28):
Bow to your sensei.
Bow to your sensei.
Mary and Voices (02:31):
I finally caught up on all your podcasts
and while I have been followingMarkets since I was a teenager,
I didn't realize untildiscovering your podcast via the
Bogleheads forum that I onlyknew just enough to be dangerous
.
You have given me a holisticnarrative framework through
(02:58):
which to think about somepersonal investing that I am now
trying to put into practice atthe age of 34.
Wish I knew sooner, but betterlate than never.
I have a few questions.
Apologies for the worriness,Aunt Mary.
Voices (03:11):
Mary, Mary, why you bugging?
Mary and Voices (03:15):
And would welcome your consulting service
as well, if still on offer.
I am in the accumulation phasewith a wife and small children.
Voices (03:23):
I don't care about the children, I just care about
their parents' money.
Mary and Voices (03:27):
I have an approximately $1 million
portfolio which I hope to growvia a relatively high earning
career over the next 15 to 20years, with the hopes of
transitioning to part-time workand living off a modified golden
ratio portfolio until socialsecurity kicks in.
Modified golden ratio portfoliountil social security kicks in.
(03:50):
Portfolio breakdownApproximately 31% real estate,
equity and rental properties,excluding primary residence.
I count this here because Ihope to sell these one day and
convert into securities, but ifnot, we'll remove and count the
income against my fire incomegoal.
Approximately 16% cash securityand for opportunistic
investments Approximately 7%private securities.
(04:11):
Approximately 4.5% T401K-likeprivate company ESOP, which
should grow nicely over time,and approximately 2.5% VC fund
playing around.
Voices (04:24):
Cool approximately 2.5%.
Mary and Voices (04:25):
VC fund playing around 0.5% physical gold and
silver plus some crypto,approximately 45.5% in public
securities where I focusaccumulation Approximately 2% in
play money my wife likespicking stocks and thematic
funds in her play account wifelikes picking stocks and
(05:12):
thematic funds in her play.
Taxable brokerage 25% each toSCHG, avuv, brkb, vxus.
Should I swap SCHG for VOO orVTI?
Considering swapping VXS forDFIV and DISV, with five
securities at 20% each,increasing XUS weighting
Approximately 15%.
(05:33):
401k approximately 8% T401k.
25% each to SWTSX, sx, dfsv,ixus, avdv.
(05:54):
Considering swapping SWTSX forSWLGX, ixus for EVF and adding
AVES with five securities at 20%each, increasing XUS weighting
Approximately 7%.
R40, 401k.
80%.
20%.
Fxaix, fspsx.
Considering mirroring T401k ifI make the changes noted,
approximately 17.5% are acrosstwo Roth IRAs and HSA.
(06:17):
80% FZROX, 20% FZILX.
Considering mirroring T401k ifI make the changes noted 20%
each FSPGX or FZROX, dfsv, efv,avdv, aves.
Approximately 5% in three 529s.
(06:41):
Using the Vanguard target date2041 portfolio.
We'll look to use whatever isleft after college in
approximately 17 to 21 years tofund my kids' Roth IRAs.
So currently approximately 70%US stocks, approximately 28%
ex-US stocks and approximately2% bonds and liquid alternatives
.
Key questions I'm conflictedbetween LCG and USTSM, assuming
(07:07):
growth is due to underperform asit has begun to this year.
Cue crystal ball sound.
Drop Crystal ball can help you.
It can guide you.
I'm leaning towards increasingex-US allocation, given I do not
have any gold or otheralternatives to hedge the US
dollar market and, assuming theUS is due to underperform, as it
(07:29):
has also begun to this year,cue the crystal ball drop again.
As you can see, I've gotseveral here, a really big one
here, which is huge.
Note I added gold to myportfolio after starting your
podcast from the beginning, thenremoved it after making it
through some episodes andunderstanding it is not
(07:51):
necessary during theaccumulation.
So I missed this year's run upand I am a bit neurotic, as you
can see.
Voices (07:57):
You are talking about the nonsensical ravings of a
lunatic mind.
Mary and Voices (08:03):
I am maxing out tax-advantaged accounts and
saving regularly into taxableand throwing in excess bonus
there as well, so understandthat the deposits here will have
more impact over the long termthan the fund choices.
But should I consider doinganything differently?
Should I consider alternativeassets at this stage or even a
small allocation to LTT in myprimary accounts?
(08:24):
I also question if I have theright temperament to hold SCV,
given it sometimes takes about15 to 20 years for the premium
to show up and assuming LCV ismore likely to express the value
factor premium in a passiveinvesting world where larger
market cap companies draw in themost dollars.
I don't know, you don't know,nobody knows.
Voices (08:45):
Does that make you different than most everybody
dollars?
I don't know, you don't know,nobody knows.
Does that make you differentthan most everybody else?
The answer is yes.
Somebody says well, why is that?
We don't know, what do we knowyou?
Mary and Voices (08:58):
don't know, I don't know, nobody knows.
I further question if valuefunds can even appropriately
calculate value for moderncompanies where spending on
intangible assets isn't capturedin the book value.
Just trying to get an approachthat I can stick to for about 15
to 20 years and stop agonizingand tweaking, but very concerned
about another lost decade in USstocks or if I'm missing
(09:19):
something key.
Voices (09:21):
You're insane gold member.
Mary and Voices (09:25):
Lastly, what do you think about this modified
golden ratio portfolio?
Voices (09:30):
Mary, Mary, I need your huggin'.
Mostly Uncle Frank (09:39):
Well, first off, thank you for being a donor
to the Father McKenna Center.
Voices (09:46):
We few, we happy few, we band of brothers.
Mostly Uncle Frank (09:54):
As most of you know, we do not have any
sponsors on this program, but wedo have a charity we support.
It's called the Father McKennaCenter and it supports hungry
and homeless people inWashington DC.
Full disclosure I am in theboard of the charity and am the
current treasurer, but if yougive to the charity, you get to
(10:15):
go to the front of the emailline.
Voices (10:18):
Groovy baby.
Mostly Uncle Frank (10:20):
And there are two ways to do that.
You can give directly, asMichael has done here at the
Father McKenna website, and Iwill put that donation page in
the show notes.
Or you can join us as one ofour patrons on Patreon, which
you can do through the supportpage at wwwriskparadisecom.
And either way you can go tothe front of the email line with
(10:43):
that.
Just make sure you mention itin your email so I can duly move
it up, as it were.
And the line is about twomonths long now, so it is worth
something I should think.
Voices (10:57):
That's gold, jerry gold.
Mostly Uncle Frank (11:00):
But now getting to your email, so I see
you're at the age of 34.
You're still quite young andstill have a ways to go in terms
of earning money and investingmoney.
Your situation is actually verysimilar to our eldest son, who
is not quite 30, but is also onthis same track and also has
(11:21):
some real estate, since hefollowed the formula in Set for
Life by Scott Trench, which isan excellent book for people in
their 20s, and so he's ended upwith a rental property that is
appreciated in valuesubstantially in addition to the
current house he's living in,which is also house hacking.
Once you have a family, househacking is probably not for you,
(11:42):
at least if it's only onedwelling, forget about it.
So just some generalobservations first.
First, you should consider yoursituation as you sitting on a
giant pile of future cash thatyou have not invested yet, which
means that although yourinvestments are substantial
(12:03):
right now, they are notsubstantial when you compare it
to all of the investments you'relikely to make in the future,
which means you can take a lotof risk and should be
essentially 100% equities inmost of your invested assets.
So the real estate is great ifit's rental real estate and if
(12:24):
it is producing positive cashflows.
That is really the key here,and that's, after all, of your
expenses.
I would just make sure it's nottaking up too much of your time
, because your time is probablybetter spent earning more money
if you're in a high-earningcareer and spending it with your
wife and children.
Voices (12:43):
Why?
What have children ever donefor me?
Mostly Uncle Frank (12:47):
Real estate makes actually the most sense
for people who are in loweryielding careers and have more
time.
But as long as you're enjoyingthat, just keep with it and it
will be an excellent thing tohave long term.
All right.
It says you also have 16% incash.
That is probably too much cash,because if you have a
(13:07):
million-dollar portfolio, youhave $160,000 in cash.
Now I realize that you willneed some of that to support the
real estate, obviously, becauseyou have to be in a position to
pay for repairs and deal withvacancies and things like that.
But above and beyond that andwhatever you need in terms of an
emergency fund, generally,having just big piles of cash
(13:30):
sloshing around is not ideal,unless you have a specific thing
you were planning to spend iton in the next few years.
Here, what may work better foryou is what our eldest son does
with his extra money essentially, which is to create an
intermediate term portfolio thatis essentially a retirement
(13:51):
portfolio.
So it looks like a risk paritystyle portfolio.
In fact, he uses a variation ofthe golden ratio, and so he's
got his long-term assets inretirement accounts, et cetera,
which are essentially 100%equities, his short-term assets
in retirement accounts, etc.
Which are essentially 100%equities, his short-term stuff,
which is enough cash to supporthis real estate, and a small
(14:11):
emergency fund.
He really doesn't need much,because he doesn't have a wife
and children like you do.
Voices (14:16):
All we need to do is get your confidence back so you can
make me more money.
Mostly Uncle Frank (14:22):
But then the rest of this goes in an
intermediate kind of portfoliothat is allocated something like
a golden ratio.
The reason something like thatworks as long as you have, say,
three years of possibility isbecause those kinds of
portfolios tend only to be downthree or four years max.
(14:42):
So it can be used as this kindof intermediate accumulation
portfolio.
And so the last thing he usedit for was to buy some solar
panels for one of his houses,and if he needs to buy a
replacement car he can just buyit out of that.
But if you have something likethat, then you are not stuck
with just big piles of cash thataren't yielding very much.
(15:04):
So basically, the way hisfinances work is fills up all
the retirement accounts,accumulates the cash in the
checking account and emergencyfund type thing and then, as
that money kind of overflows orbuilds up, it then goes into
this intermediate account whichis then invested in this golden
ratio kind of portfolio.
(15:25):
All right, the 7% in privatesecurities.
Yeah, you have an ESOP.
That's great.
Take advantage of that.
It is what it is and it goeswith the job, so take it with
the job as part of yourcompensation.
Voices (15:39):
I don't think I'd like another job.
Mostly Uncle Frank (15:42):
The 2.5% in a venture capital fund yes,
think I'd like another job.
The 2.5% in a venture capitalfund yes, that is playing around
, so that's a small amount youcan play around with, so it's no
big deal.
0.5% physical gold and silverplus some crypto Again, that is
playing around money.
As far as I'm concerned, makesure you don't actually lose
your physical metals, or makesure you also keep them in a
(16:02):
safe place and do not advertisethat you have them, lest you
become a target for burglars ordisreputable cousins or somebody
else who might want to take itwhat jimmy really loved to do.
Voices (16:16):
What he really loved to do was steal.
I mean, he actually enjoyed it.
Jimmy was the kind of guy whorooted for the bad guys in the
movies.
Mostly Uncle Frank (16:25):
It looks like the rest of it.
You have some playing aroundmoney.
Looks like you're experimentingwith a return-stacked kind of
portfolio involving someleverage.
That's fine too, as long as itdoesn't get too large.
Voices (16:40):
You have a gambling problem.
Mostly Uncle Frank (16:43):
And then most of your money looks like
it's invested in a variety ofindex funds, which is where it
really belongs on your timeframe, although I would get rid
of this target date fund if youwant to know why.
Voices (16:58):
Go listen to episode 333 .
Mostly Uncle Frank (17:01):
Forget about it.
I would just put that all instocks, at least for the next
decade, and then think about itafter you kids get to high
school around there.
Okay, looking at your specificquestions, you say you're
conflicted between large capgrowth and US total stock market
.
Well, I wouldn't be conflictedby that.
Those are questions 99%correlated for the most part, so
(17:22):
it's kind of six of one, half adozen the other.
This is one of these kinds ofquestions that seems important
but it's not really important.
And whenever you are thinkingabout two different assets, one
of the things you should dofirst is go to a correlation
analyzer.
The one at Testfolio isactually the easiest one to use
now.
It's better than the one atPortfolio Visualizer, I think.
(17:43):
So go there to the AssetAnalyzer and you can see
comparative performances andcorrelations.
And when you have things thatare that highly correlated,
there isn't really a significantdifference between the two of
them.
The reason that you would holdlarge cap growth has more to do
with what else is in yourportfolio, because if you are
(18:06):
just holding one thing, youwould probably just hold the
total stock market.
But if you're going to hold avariety of things across
different asset classes, thenyou want some of that large cap
growth as one of thoseallocations.
Your reaction to it going downthis year and large cap growth
has underperformed If you lookat the MAG-7, it's down like 20%
(18:29):
and the rest of the S&P 500 isessentially flat.
But that's a good thing in yourcircumstance, because of your
time frame and that's what youreally need to be thinking about
.
You actually want to havethings that crash in the near
term so that you can buy more ofthem or rebalance into them,
like you would have done in 2022, when large cap growth was down
(18:51):
30 to 40 percent and valuestocks were down zero to 10
percent or even up.
That was a rebalancingopportunity, or an opportunity
to focus more on the large capgrowth and buy more of it.
You are actually hoping thatsomething like that happens.
If you are investing in largecap growth and you are hoping
that it happens in the nextdecade, because after another
(19:15):
decade, then you will bethinking about moving to more
conservative allocations.
So, as large cap growth isgoing down right now, I would be
inclined to be buying more ofit, not less of it.
All right, your next questionwas leaning towards increasing
the international allocation,given you do not have gold or
other alternatives to hedge theUS dollar slash markets.
(19:37):
Well, I think that's fine.
Just pick something and stickwith it that you don't want to
be jumping in and out ofinternational stocks or funds.
So if you are going to committo a certain amount of
allocation to that, make surethat's a long-term commitment
and that you are continuing toinvest in it when it
underperforms and thenrebalancing out of it when it
(20:00):
overperforms.
It's just like anything else.
It just adds a level ofcomplication, but it doesn't
seem like that bothers you.
In fact, it seems like youenjoy a little complication here
.
So this may be exactly for you.
To incorporate some of theseinternational funds.
I would use those onesrecommended by Paul Merriman
(20:21):
that are mostly the Avantis andDFA funds.
I think they're just betterformulated and better positioned
and easier to use as part of aoverall portfolio, especially if
you are pairing a US large capgrowth in with an international
value fund.
I don't think you really needanything, though, to hedge your
portfolio in any way, shape orform, simply because you have
(20:44):
such a long time frame thatyou're dealing with that.
The time is the hedge and youshould not be thinking about
trying to reduce volatility atthis point with hedges of any
kind, and that's why it probablydoesn't make sense for you to
be using an alternative likegold in your portfolio right now
, except for that intermediateportfolio we talked about before
(21:06):
, because you do not expect goldto outperform stocks over long
periods of time, like 15 to 20years.
It can and it will over shortperiods of time, but that
doesn't always happen that way.
Voices (21:18):
I love gold.
Mostly Uncle Frank (21:22):
Usually you would expect it to perform
somewhere between bonds andstocks overall over long periods
of time, and its key attributethat makes it useful in a
portfolio is that it'sdiversified from both stocks and
bonds.
But that's not of that much useto you when you're in an
accumulation phase.
To you when you're in anaccumulation phase and I think
(21:45):
that gets some into your finalquestion that, no, you don't
need bonds or other alternativesright now if you really don't
want them.
The reason that you would holdsomething like those things is
wanting to sleep well at night,because there are people that
like to accumulate in a riskparity style portfolio simply
because they don't like thevolatility of a regular
accumulation portfolio.
(22:05):
You do not seem to be one ofthose people.
Mary and Voices (22:08):
I think I've improved on your methods a bit
too.
Mostly Uncle Frank (22:11):
And, in any event, you do have this
substantial allocation to realestate as well.
You also ask some questionsabout value generally and small
cap value.
Voices (22:20):
I'm telling you, fellas, you're going to want that
cowbell.
Mostly Uncle Frank (22:24):
What you should recognize is that when
your large cap growth stocks arefalling, they are likely to
fall much more than your valuestocks.
And so if you get another year,like 2022 or the years between
2000 and 2003, those valuestocks will give you an
(22:45):
opportunity to rebalance intothe growth stocks which have
fallen substantially.
And that's the reason you holdthe two of those things together
, because they tend to work wellin rebalancing scenarios.
And now, if you look at a stylebox chart, like you see at
Morningstar, looks like thattic-tac-toe board with size from
(23:08):
small to large going on thevertical axis and then value
versus growth on the horizontalaxis.
If you look at that upper leftcorner the large cap value box,
left corner, the large cap valuebox that box, we know pretty
well, is going to have overalllower returns and lower
(23:30):
volatility.
So it's generally not somethingyou want when you are
accumulating, unless you arejust looking for lower
volatility for some reason.
But think about that.
If you take that box out of thetotal, what you have left then
is going to be the rest of themarket, which is going to be
higher volatility and higherpotential returns than what is
(23:52):
in that large cap value box.
And so the question then iswell, what do you pick out of
everything else in those boxes?
We know that small cap growth isextremely volatile, and its
volatility probably outweighsits value in terms of
performance.
So the best two things that tendto offer performance versus
(24:15):
volatility tend to be in thatupper right hand corner box,
which is large cap growth, andthe lower left hand corner box,
which is small cap value growth,and the lower left hand corner
box, which is small cap value,and those two things tend to
work together pretty well.
So I would actually not holdsmall cap value because you
think it's going to outperformeverything else in the market.
(24:36):
All you really care about andall you really need is something
that performs equally well butat different times than
something like large cap growth.
That is the lesson of Shannon'sdemon, which is the math behind
modern portfolio theory that ifyou have two things that
perform about the same but theyperform differently at different
(24:58):
times, holding both of themtogether will outperform either
one of them alone because ofthis rebalancing possibility,
and that's just math.
And that's why you should beholding value stocks with your
growth stocks, not because youthink that there's crystal balls
or there's going to be magicaloutperformances or other things
(25:19):
like that.
Mary and Voices (25:22):
Now you can also use the bull to connect to
the spirit world.
Mostly Uncle Frank (25:26):
But if you do happen to have a lost decade,
like the 1970s or the early2000s, you will be very happy to
be holding any kinds of valuestocks, whether they be small,
large, international or whatever, because they will greatly
outperform the growth stockswhich are going to be dragging
the rest of the market down inthose circumstances.
(25:47):
All right, your last questionwhat do I think about this
modified golden ratio portfolio?
And I did not make Mary readall of these 16 funds that you
stuck in it.
I think it's probably overlycomplicated, but it looks fine
(26:13):
in terms of its overall macroallocations.
I mean, just remember that thepurpose of this kind of a
portfolio is for drawing down.
On that, she'll hopefully havea high, safe withdrawal rate,
and so that's what you should bethinking of.
And there are some generalcriteria that we know work
pretty well, and you seem tohave matched all the criteria
(26:35):
here.
I'm just going through thosecriteria.
The first two come from BillBengen.
One is to keep your equitiessomewhere between about 40% and
70% of the total portfolio, andyou've done that here.
Looks like you have around 50%in what you've got listed here.
The second criteria from BillBengen is to keep your cash
(26:57):
holdings at 10% or less of theportfolio, and I would say
you've done that because youhave very little to no cash in
this sample portfolio you'veconstructed.
The third thing is to splityour stocks between growth and
value for the reasons we've beendiscussing, because they make
good rebalancing pairs, and itlooks like you've done that too.
(27:18):
And then the fourth thing wouldbe to have somewhere between 20
and 30 percent in treasurybonds, and it looks like you've
got some strips in here andyou've thrown a little preferred
shares in there.
I'm not sure you actually needthose in this kind of portfolio,
but it's not wrong to have somerecognized there.
Do not perform so much liketreasury bonds, but they make
(27:40):
sense.
If you have a bond like thingyou need to put in a taxable
account because they payqualified dividends.
And then finally, you want tohave between 10 and 25 percent
in alternative assets and youhave 16 percent in gold in this
portfolio and about 6 percent inmanaged futures, and so that
also fulfills that requirementor guideline also fulfills that
(28:03):
requirement or guideline.
So what you've constructed herelooks like it works fine.
Maybe you could try this out asyour intermediate portfolio and
see how it runs, although I'mnot sure you really want to
manage 16 funds and you reallydon't need that many funds to do
something like this.
But you can if you like.
Voices (28:23):
Hearts and kidneys are tinker toys.
Mostly Uncle Frank (28:26):
So hopefully all of that helps.
Thank you for your support ofthe Father McKenna Center and
thank you for your email.
Put me in a state, a state ofshock.
We're doing it.
Voices (28:45):
Come on, baby.
She put me Woo it's.
Mostly Uncle Frank (28:57):
Daddy's Talk .
Second off, we have an emailfrom Brian.
Voices (29:02):
Hey, Brian, care to place a wager?
Mostly Uncle Frank (29:05):
And Brian writes.
Mary and Voices (29:07):
Hi Frank, thanks to you and Mary and all
the good work, I've made a smalldonation to the Father McKenna
Center.
I'm a DIY investor currentlyusing a stock golden butterfly
allocation.
After listening to RationalReminder, episode 350, I became
curious about an all-equityapproach, especially in light of
the Cederberg et al paper.
(29:27):
Beyond the Status Quo, theauthors conclude that for
investors with access tointernational equities and no
leverage, an all-equityportfolio is optimal through
retirement, with no meaningfulbenefit to holding bonds.
Voices (29:41):
That's not how it works.
That's not how any of thisworks.
Mary and Voices (29:46):
Out of curiosity, I compared the golden
butterfly with a couple ofall-equity 50-50 and 33-67
portfolios.
Using Monte Carlo simulationsand a 5% withdrawal rate.
The golden butterfly showedmeaningfully better outcomes at
the 10th and 25th percentiles.
I'm wondering am I missingsomething?
I'd love to hear your thoughts.
(30:06):
Best regards, brian.
Yeah, you got money to pay forfake mustaches.
Voices (30:11):
Huh yeah, how much you pay for that fake mustache?
$2.99.
Ah Ow.
Mostly Uncle Frank (30:18):
Ah Well, I need to also thank you too,
Brian, for being a donor to theFather McKenna Center, and that
is why your email has also beenmoved to the front of the email
queue here.
But now, getting to your email,I see you have stumbled on this
Cedarburg paper, which I don'tknow why the guys at Rational
(30:40):
Reminder are so enamored withthis, because it does not mean
what you think it means.
Voices (30:46):
Inconceivable.
Mostly Uncle Frank (30:48):
And they are really honestly doing
themselves a disservice byfixating on this.
I guess there's a new versionof it out now, but I really
think it's damaging theircredibility at this point as
financial advisors, and we'lltalk about why in a second here.
But we've already talked aboutthis paper over and over again
and linked to a number ofcriticisms of it in its various
(31:12):
guises and forms, and thoseepisodes are episodes 307, 319,
320, 320, 323, 341, 388, and 406.
(31:33):
And it actually has myriadproblems.
But the biggest problem is howthis has been presented by PWL
Capital and others as sayingthat a 100% stock portfolio is
going to outperform a portfoliowith bonds in it, because that
is not actually what this studysays.
And if you think that's whatthis study says, you are under a
misimpression or have beenmisled by somebody.
Voices (31:55):
Oh no my young Jedi, you will find that it is you who
are mistaken about a great manythings.
Mostly Uncle Frank (32:12):
So you need to appreciate what is actually
being compared here.
This is a very strange modelthey are using for this academic
study.
What they've done is they'vetaken 10-year segments from a
variety of countries.
I think it's like 30-some.
So let's just pick a country,say France.
Voices (32:34):
You don't fight an ass English pig dogs.
Don't fight the nice Englishpig dogs.
Mostly Uncle Frank (32:38):
So what they are comparing there on one side
is a portfolio that has onlyFrench bonds in it as its bonds
and the French equivalent ofT-bills and then some stocks.
That is one portfolio that isgenerally about a third in
(33:03):
French stocks and then the restof that in what is international
stocks from the Frenchperspective, which is mostly US
stocks, because the US market isthe largest.
So when it says internationalin that comparison it is
(33:28):
actually in most cases talkingabout a majority in US equities.
And then they take a wholeseries of those 10-year segments
and jumble them up.
So you're in France one decade,then the next decade you're in
Germany, then the next decadeyou're in Sweden, then the next
decade you're in the US.
Obviously nobody actuallyinvests that way, so this is
only of academic interest, butat its fundamental basis it is
(33:49):
essentially comparing in mostcircumstances the bonds of a
country that is a non-reservedcurrency country at the time, in
particular like Francehistorically and the US equity
market.
So, as you can imagine, in mostcircumstances owning bonds in
some country that could be warravaged or have some other
(34:12):
problems historically to the USequity market, the US equity
market's always going to win.
And because that is the majorcomponent of these total stock
market allocations and whatthey're comparing it to.
That is why the 100% equityportfolio looks so good.
It's not because of theequities, it's because of the
(34:34):
bonds that they're using tocompare with the equities, which
in most cases are bonds innon-reserved currencies, some of
which are highly speculative inthese circumstances.
So since nobody actuallyinvests that way and nobody
would recommend that somebodyinvests that way, this study is
only of really academic interestand that is why, when you put
(34:56):
in the links that you comparedthe golden butterfly into just
regular portfolios that peoplewould actually be investing in,
you see that the morediversified portfolio does
outperform the all equityportfolios in drawdown scenarios
and nothing in that study haschanged that fact.
Voices (35:16):
That's the fact, Jack.
That's the fact, Jack.
Change that fact.
Mostly Uncle Frank (35:21):
So when you say, am I missing something?
The only thing you're missingis that you've been misled about
what you think that study means.
And unless you've read it, andreally thought about it, you
will not get a correctimpression of the limitations of
it.
If you want to look atsomething that's much more
(35:42):
interesting in terms of globalportfolios involving various
countries over time, tyler overat Portfolio Charts did an
excellent study last yearlooking at a variety of
different countries anddifferent portfolios in those
countries involving domesticequities, what would be
international equities for eachcountry, domestic and
(36:04):
international bonds and gold,and you'll see some interesting
results there.
I'll link to that in the shownotes.
We've linked to it before, butthat would be a much more
interesting and useful thing tobe looking at than this
Cederberg study.
Forget about it and that's aboutall I have to say about it.
(36:24):
I'm sorry.
You've been misled whetheryou've been misled by that
rational reminder podcast oranother and it's really out of
character for those guys becausethey usually don't do that, but
in this case they've reallygotten wound up on this one
study and methodology.
That doesn't, frankly, make awhole lot of sense given the
business that they're in,because I don't think that they
are recommending that theirclients adopt these kinds of
(36:47):
portfolios.
But everyone makes mistakes andI hope they stop making this
one soon enough.
Voices (36:55):
Here to reply to a recent editorial is Miss Emily
Lytella.
Here to reply to a recenteditorial is Ms Emily Lytela.
I'm here tonight to speak outagainst busting schoolchildren.
Busting schoolchildren is aterrible, terrible thing.
I hear this is going on allover the country.
(37:16):
The food in jail isn't good,and even though they get bread,
I don't believe they can gettoast or nice cake.
Now, who will tuck them in?
Where will they hang theirleggings?
Where will they set up theirlittle lemonade stands?
(37:38):
No, they don't have toys injail, except maybe tiny tears
dolls.
And did you know?
They have little holes in theirbottoms there, the tiny tears
and you can get.
Where will they put their toysaway?
Excuse me, If they have toys.
Mary and Voices (37:54):
Miss Vitella.
Yes, I'm sorry, the editorialwas on busing schoolchildren B.
Voices (37:58):
Yes, I'm sorry, the editorial was on busing school
children Bussing, bussing, ohNot busting, I'm sorry, never
mind.
Mostly Uncle Frank (38:08):
Hopefully that helps and thank you for
your email.
Voices (38:12):
So, brian, we're even now right Ready to start a new
life in England.
I've got my money.
Your wounds have healed upnicely.
What do you say?
We let bygones be bygones.
Hmm, you shot me in both myknees then lit me on fire.
All right, all right, I tellyou what you get one free
revenge shot at me, okay, butI'm not going to tell you when
it's coming.
(38:36):
Ah, this is going to be fun.
Last off.
Last off.
Mostly Uncle Frank (38:41):
Last off of an email from Ed.
Hello, I'm Mr Ed, and Ed writes.
Mary and Voices (38:52):
Hi Frank, I enjoy your show, both for the
entertainment value and adviceyou never know what you're going
to get.
We are in our 40s and havesaved to our retirement plans at
work and also have a brokerageaccount.
We have about 20 years or soleft before our decumulation
phase, when we will have agolden ratio or golden butterfly
(39:12):
type portfolio.
What are your thoughts for ouraccumulation phase portfolio now
, so that the eventualtransition will be easy?
Our 401ks have limited options,mainly index funds and target
date funds.
Thanks, ed.
Voices (39:28):
Market drops five points , I'm glad my money's tied up in
hay.
Mostly Uncle Frank (39:34):
Well, thank you for your email, ed.
Yes, I think, since you're stilltwo decades from retirement,
you should just stick with indexfunds, and which ones you use
is almost not that important,particularly if it's in a 401k
and you can make transactionsanytime you want without paying
(39:56):
any taxes, including when youget towards retirement anytime
you want without paying anytaxes, including when you get
towards retirement.
So you could just do it in atotal stock market fund or add
any number of other things.
Like our first emailer today,what I like to use is something
that is half large cap growth,or a total stock market fund or
an S&P 500 fund, and pair thatwith something in the small cap
value category.
(40:16):
But if you don't have thosethings, you don't.
And pair that with something inthe small cap value category.
But if you don't have thosethings, you don't have those
things.
I would avoid small cap growthfunds and things that are
allocated to small cap growth.
Other than that, I'd be moresensitive to the fees being
charged by these funds thananything else.
Do not use target date funds.
Voices (40:38):
Not going to do it Wouldn't be prudent at this
juncture.
Mostly Uncle Frank (40:41):
If you want to know why, go listen to
episode 333.
They will only slow down youraccumulation.
Voices (40:49):
You're going to end up eating a steady diet of
government cheese and living ina van down by the river.
Mostly Uncle Frank (40:58):
Now, if most of your money is in 401ks, your
transition will be relativelyeasy, simply because you're just
going to move it to an IRA andmake the transactions you need
and then have the kind ofportfolio that you want.
If you have money accumulatingin taxable accounts, I would
focus those on all equities, andif you were wanting to add
(41:21):
small cap value to yourportfolio, oftentimes that's a
good place to put it,particularly if you don't have
that available in your 401k.
Now you can also have IRAs andput different index funds in
those to match whatever you haveavailable in your 401k.
So what a lot of people end updoing is they have, like an S&P
(41:41):
500 fund in their 401k becauseit's cheap, and then they use
their other accounts to add ineither international funds or
small cap value funds orwhatever else they want for
their accumulation, and then,when you get to your transition
phase, you do most of yourtransactions in the retirement
accounts to avoid any taxationat that point in time.
(42:03):
Now I realize you're not abeginning investor, but you
might be interested in listeningto the advice to beginning
investors which is in episode208.
It's on a Wizard of Oz theme.
Voices (42:18):
What kind of a horse is that?
I've never seen a horse likethat before now and never will
again.
I fancy there's only one ofthem and he's it.
Mostly Uncle Frank (42:26):
These are yours, of a different color
you've had tell about but Ireally think that most people
can successfully accumulate withbetween one and four index
funds and it doesn't need to beany more complicated than that.
The main key is to just pick aformulation and then just stick
(42:46):
with it and not be jumpingaround from fund to fund,
because that's really howamateurs underperform.
They look and see somethingthat's performed well in the
last one to ten years andallocate to that or primarily to
that, and then it underperformsand then they jump to a
different fund and then thatunderperforms and they jump to a
different fund, in which casewhat they're essentially doing
(43:09):
is buying high and selling low.
You want to avoid that by justpicking some reasonable
allocation to a few funds andjust sticking with them, or just
adding other funds later on asyou accumulate more money.
At the beginning, just havingone fund is just fine, as long
as it's a low cost index fund.
(43:30):
So hopefully that helps andthank you for your email.
Voices (43:36):
A horse is a horse, of course, of course, and this one
will talk to his voice, hishorse.
You never heard of a talkinghorse.
Well, listen to this.
Mostly Uncle Frank (43:47):
I am Mr Ed, but now I see our signal is
beginning to fade.
If you have comments orquestions for me, please send
them tofrankatriskparityradarcom.
That email isfrankatriskparityradarcom.
Or you can go to the website,wwwriskparityradarcom.
(44:09):
Put your message into thecontact form and 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.
That would be great.
Okay, thank you once again fortuning in.
This is Frank Vasquez with RiskParty Radio Signing off.
Voices (44:39):
Thanks for listening.
And the wind screams.
Will the wind ever remember thenames it has blown in the past?
But with its crutch, its oldage and its wisdom, it whispers
(45:04):
no, this will be the last.
Mary and Voices (45:51):
And away cries Mary.
Thank you very much.
Please consult with your ownadvisors before taking any
actions based on any informationyou have heard here, making
sure to take into account yourown personal circumstances.
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