In this episode we answer emails from El Yama, Graham, and James. We discuss using risk parity-style portfolios for intermediate term needs, the short-term bond allocation in the Golden Butterfly, accounting for child credit, rising equity glidepaths, the fundamental differences between 100% stock portfolios and diversified portfolios and why you want the latter for retirement unless your goal is to die with the most money, and a CAPE ratio critique from Meb Faber's podcast.
And THEN we our go through our weekly portfolio reviews of the eight sample portfolios you can find at Portfolios | Risk Parity Radio.
Additional links:
Kitces Article re Rising Glidepaths: The Benefits Of A Rising Equity Glidepath In Retirement
Kitces/Pfau Paper re Rising Glidepaths: Reducing Retirement Risk with a Rising Equity Glide-Path by Wade D. Pfau, Michael Kitces :: SSRN
Meb Faber Podcast with Brian Jacobs discussing problems with CAPE ratio predictions: A Century of No Return! The Truth About The Beloved Bonds (Brian Jacobs of Aptus Reveals)
Breathless Unedited AI-Bot Summary:
"A foolish consistency is the hobgoblin of little minds," begins this thought-provoking exploration of why most investors are trapped in accumulation-phase thinking even as they approach or enter retirement.
The question at the heart of this episode strikes at a surprising disconnect in personal finance: Why do so many investors intellectually understand they're investing to enjoy retirement, yet construct portfolios clearly designed to maximize wealth at death?
Through a series of illuminating listener emails, Frank unpacks how portfolios optimized for accumulation often fail spectacularly during the decumulation phase. One listener confesses he "always wondered why anyone would buy bonds when clearly stocks give a far greater return," before discovering through portfolio testing that a 100% equity portfolio would have "failed catastrophically" for someone retiring around 2000-2003.
This recognition—that diversification isn't about maximizing returns but enabling sustainable withdrawals—represents the fundamental insight many investors miss until too late. As Frank colorfully puts it, if your goal is to "die with the most money possible" in your "golden coffin," then by all means stick with 90-100% equities. But if you actually intend to enjoy your retirement by spending more than 3% of your portfolio annually, a properly diversified approach becomes essential.
The episode also addresses why attempts to use valuation metrics like CAPE ratios to predict market movements have largely failed, and why separating your portfolio into growth and value components offers a more reliable approach to capturing rebalancing bonuses without attempting market timing.
Make sure your investment behavior actually matches your stated goals. If you're planning to spend in retirement, construct a portfolio that optimizes for sustainable withdrawals, not maximum theoretical returns.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Voices (00:01):
A foolish consistency, is the hobgoblin of little minds
, adored by little statesmen andphilosophers and divines.
If a man does not keep pacewith his companions, perhaps it
is because he hears a differentdrummer.
Mary and Voices (00:17):
A different drummer and now, coming to you
from dead center on your dial,welcome to Risk Parity Radio,
where we explore alternativesand asset allocations 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 (00:38):
Thank you, Mary, and welcome to Risk Parity
Radio.
If you have just stumbled inhere, you will find that this
podcast is kind of like a divebar of personal finance and
do-it-yourself investing.
Voices (00:53):
Expect the unexpected.
Mostly Uncle Frank (00:56):
It's a relatively small place.
It's just me and Mary in hereand we only have a few
mismatched bar stools and someeasy chairs.
We have no sponsors, we have noguests and we have no expansion
plans.
Voices (01:12):
I don't think I'd like another job.
Mostly Uncle Frank (01:15):
There are basically two kinds of people
that like to hang out in thislittle dive bar.
Voices (01:19):
You see, in this world there's two kinds of people.
Mostly Uncle Frank (01:22):
my friend, the smaller group are those who
actually think the host is funny, regardless of the content of
the podcast.
Voices (01:31):
Funny how?
Mostly Uncle Frank (01:32):
How am I funny?
These include friends andfamily and a number of people
named Abby.
Voices (01:40):
Abby, someone Abby who Abby, normal Abby, someone Abby
who Abby normal, abby normal.
Mostly Uncle Frank (01:48):
The larger group includes a number of
highly successful do-it-yourselfinvestors, many of whom have
accumulated multi-million dollarportfolios over a period of
years.
Voices (02:02):
The best, Jerry the best .
Mostly Uncle Frank (02:05):
And they are here to share information and
to gather information to helpthem continue managing their
portfolios as they go forward,particularly as they get to
their distribution ordecumulation phases of their
financial life.
Voices (02:23):
What we do is, if we need that extra push over the
cliff, you know what we do Putit up to 11.
11, exactly.
Mostly Uncle Frank (02:31):
But whomever you are, you are welcome here.
Voices (02:35):
I have a feeling we're not in Kansas anymore.
Mostly Uncle Frank (02:39):
But now onward, episode 416.
Today on Risk Parity Radio,it's time for our weekly
portfolio review.
So the eight sample portfoliosyou can find at
wwwriskparityradiocom on theportfolios page.
Boring, yeah, it is kind ofboring.
Actually, it's the same storyevery week.
(03:01):
Us stock market goes down, goldgoes up.
Voices (03:06):
You're insane gold member.
Mostly Uncle Frank (03:09):
Everything else kind of goes up and down.
Voices (03:12):
And that's the way.
Uh-huh, uh-huh, I like it.
Kc on the sunshine band.
Mostly Uncle Frank (03:18):
So I think the only excitement we have to
look forward to will be therebalancings in July.
Voices (03:23):
That is the straight stuff.
Oh funk master.
But before we get to that, I'mintrigued by this how you say
Emails.
Mostly Uncle Frank (03:35):
And First off.
First off, we have an emailfrom El Yama.
This looks like a long one,mayor, mary Mary, why you
buggin' Yama?
This looks like a long one,mare.
Mary and Voices (03:52):
And El Yama writes Hello Uncle Frank and
Aunt Mary, Long time listener,first time caller, although you
have had to spank me a few timeson the ChooseFI Facebook group.
Bow to your sensei.
Mostly Uncle Frank (04:05):
Bow to your sensei.
Mary and Voices (04:07):
I am an American physician assistant
with a Japanese wife and nowliving in Germany for the past
nine years raising myGerman-born children.
Alles klar, herr Kommissar Not?
Voices (04:19):
complicated at all right .
Mary and Voices (04:32):
I have been working mostly for the US
military for the past 15 years,providing health care for active
duty service members.
Voices (04:36):
What kind of training son?
Army training sir.
Army training sir.
Mary and Voices (04:42):
But I've finally saved enough to call it
quits.
At 41 years old, I've averagedabout $100,000 per year.
Over those years, Despite doingdumb things like market timing
and being way too conservative,I've managed to get to 20 times
my expenses yes, only 20 timesversus the recommended 25.
As I mentioned, I have twoyoung sons whom I absolutely
(05:06):
adore, and now that one isschool age, I refuse to
sacrifice time away from him.
I like doing the little things,like walking him to and picking
him up from school.
I think as parents, you canappreciate that the love for
your boys definitely comesthrough in the podcast.
I have been poor my whole lifegrowing up, and I'm currently at
my highest net worth.
(05:26):
I tend to be more on theconservative side with my
investments.
I will hopefully have a seriesof emails to the podcast, but
not so as to inundate you, solet me start with a couple.
First off, you commonlymentioned that some portfolios,
like Golden Butterfly etc.
Are good intermediate termportfolios.
Do you mean they are also goodintermediate term portfolios or
(05:49):
only good as intermediate termportfolios?
Could one hold it forever withits default AA, Speaking of
which you commonly mention thathaving more than 10% cash will
create a drag on a portfolio, sodon't recommend it.
Yet the golden butterfly has20% and does well in backtesting
and Monte Carlo simulations.
So which is it?
(06:11):
Second off, we will likely bereceiving about 500 euros per
month from the German governmentto help pay for the costs of
raising children for the next 20years.
Not only does it help reducecurrency risk, since it is in
euros, it is a nice cash flow tolook forward to.
My question is how do Iincorporate this money?
It really doesn't adjust forinflation, so the total value is
(06:34):
about 120,000 euros.
Should I add that to my currentnet worth of 800,000 and then
change my AA to match it usingthis money as the cash portion
920,000 versus 800,000, or justreduce the amount of expenses
I'll need to cover by 500 eurosa month?
Last off, I respect you and afew other personal finance gurus
(06:57):
, namely Michael Kitsis, WadePfau, Karsten Jeske and Bill
Bengen.
A couple of them recommend arising equity glide path to help
reduce SORR and improve SWR.
What is your take?
I currently have about 30%equities and want to get 50%
over the next five years.
I would add about 1% everyquarter.
(07:19):
This also helps me with nottiming the market.
I would have the contributionson a set schedule.
That is all for now.
I'm sorry you had to read allof this, Mary.
Mostly Uncle Frank (07:30):
Mary, Mary, I need your huggin'.
Mary and Voices (07:39):
Please let me know if you're ever in Germany.
The first beer is on me ProstPS.
Thank you for the work you dowith the Father McKenna Center.
As someone who has beentemporarily homeless and had
food scarcity a few times in mylife, I really appreciate those
efforts and will be a futuredonor.
Ali Dibesti Eliema.
Mostly Uncle Frank (08:07):
Well, first, congratulations for getting out
of poverty, and alsocongratulations for having your
head screwed on straight as towhat is most important in life,
because it certainly ain't agolden coffin.
Voices (08:20):
As human beings, you and I need fresh, pure water to
replenish our precious bodilyfluids.
Are you beginning to understand?
Mostly Uncle Frank (08:30):
Yes, All right, going to your questions
in turn.
Your first question was aboutmy statement that these kinds of
portfolios, like the golden orGolden Ratio, are good
intermediate term portfolios,and I mean that to say that they
are also good as intermediateterm portfolios.
(08:52):
So if you have a long-termportfolio that is close to 100%
equities for long-termaccumulation and then you might
have some short-term emergencyfund money and cash In between
that, you can have a risk paritystyle portfolio for these kind
of intermediate term needs, andthat's what our adult children
(09:16):
actually do.
So, for instance, when oureldest wanted to put solar
panels on his house, he justdipped into this intermediate
term portfolio, which is like agolden ratio kind of thing.
The reason these work well forthat is because their maximum
drawdown time is generally threeor four years, so the chances
are you're always going to havesomething that you can pull from
(09:39):
.
So the way they work this isfirst they make all of their
long-term contributions I'mtalking about our adult children
Then they have an emergencyfund that they fill up and then
any money after that goes intothis intermediate-term portfolio
, which they can then use forany big expenses that come along
(09:59):
the way.
Now your sub-question was couldyou hold a portfolio like this
forever with its default assetallocation?
And the answer is yes.
Actually, the originator of theGolden Butterfly portfolio,
tyler, over at Portfolio Charts,just uses his also as his
accumulation portfolio.
I think he's passed that by now.
I know that the value stockgeek uses his weird portfolio as
(10:23):
an accumulation portfolio andthey plan to just keep that, and
the reason they like it isbecause they don't want the
volatility in accumulation, eventhough they know it's going to
slow them down.
I think there's a guy namedJared Dillian who has something
called the awesome portfolio,which is another portfolio like
this, and he makes his moneywriting newsletters and books
(10:44):
and things, but he wants hisportfolio to be relatively
stable, since his income is notstable, and so he uses a risk
parity style portfolio as hisbaseline accumulation portfolio
and plans to just keep it atthat long-term.
Now, your second sub-questionhere was about the Golden
Butterfly's 20% allocation to ashort-term bond fund and my
(11:09):
admonition that having more than10% in cash tends to create a
drag on the portfolio over time.
I have two thoughts about it.
I do think that the GoldenButterfly is on the conservative
end of things, but recognizethat if you have a short-term
bond fund.
That's a one to three yearbonds you're talking about.
So those three years are morelike intermediate bonds than
(11:32):
short-term bonds.
But if you tweak that and takemoney out of that allocation and
put it into differentallocations, you'll see you can
get a better performingportfolio on some metrics like
the safe withdrawal rate ortotal returns, even though the
volatility is going to be moreso.
It's just a trade-off there,but it is significant that that
(11:53):
portfolio is not 20% in T-billsor HYSAs or something like that,
but actually has one to threeyear bonds involved there.
All right.
Your next question is about yourmoney from the German
government the 500 euros permonth for the cost of raising
children for the next 20 yearsDonate to the children's fund.
(12:17):
Why?
What have children?
Voices (12:19):
ever done for me.
Mostly Uncle Frank (12:21):
If you wanted to value that strictly
for like net worth purposes,yeah, you would model that as an
annuity with a 20-year lifetimewith that kind of payment over
the month, and then figure outhow much would it cost for you
to buy one of those things onthe open market, which you
actually can do over atImmediateAnnuitiescom.
(12:43):
I just don't think it'sprobably a worthwhile endeavor.
It is much easier and makes awhole lot more sense in this
circumstance to simply reduceyour expenses by that amount.
That is a more practicalsolution and it's certainly a
whole lot easier to calculate.
So, while you can model it bothways, I think it's more useful
to simply model it as areduction to overall expenses
(13:06):
and then look at what yourportfolio has to cover after
that.
The same thing is true whetherit's Social Security or pension
or any other payment stream thatyou have coming in.
All right, your third questionabout rising glide paths to help
reduce sequence of return risks.
Yeah, I did go back and take alook at the Kitsis and Wade Fowl
(13:26):
papers from 2013, where thisoriginated, and they are not
doing what you are proposingdoing, which is why I would not
do what you're proposing doing,because, as far as I know it's
never been modeled to make thatsharp of an increase in equity
allocations over a five-yearperiod and I don't think it
would work out.
What they were doing isincreasing by 1% each year over
(13:50):
a 30-year period, and that iscompletely different than
increasing by 1% every quarterover a five-year period.
That's why I would go back andread the paper I will link to it
in the show notes to seewhether that is of any interest
to you.
My experiences with this isthat, although the idea has been
around since at least 2013,almost nobody actually uses this
(14:14):
idea in practice.
That I'm aware of, and I'm notaware of any financial advisors
that base their modeling aroundan increasing glide path, I
think because psychologicallyit's unattractive, and it's also
kind of unattractive the waypeople actually spend, which is
to spend more earlier than later, although you could argue that
(14:37):
that augurs towards keeping alarger pile of cash to spend
early on.
But that was one of the moreinteresting things out of this
research is that what they werereally looking at to begin with
is whether the declining glidepath which has frequently been
recommended in all kinds ofhoary research about bonds,
equal 100 minus your age or somestupid thing like that.
(14:59):
Stupid is what stupid does, sir.
And what they found is thosestrategies actually detract from
your safe withdrawal rate, andso you should not be decreasing
your exposure to equities overtime.
And what they also observed isthat, to the extent that a
bucket strategy does anythingfor anybody, the reason has
nothing to do with buckets, butbecause it's essentially
(15:22):
mimicking one of these risingglide path ideas where people
are just spending their cashdown first, which results in
their portfolio being moreequity heavy.
Now what you are proposingactually is kind of going to be
completely determined on thefive-year period you're talking
about.
So it's going to have a highvariance as to what the outcomes
(15:43):
are.
Sort of like that questionshould I invest in a lump sum
right now or should I do it overthe next six to eight months?
And the answer to that isalmost a coin flip, because the
volatility of stock markets overthat period of time is almost a
random event.
A random event that most of thetime you're better off with the
(16:07):
lump sum investment, but in asignificant number of
circumstances you're better offwith the longer term dollar cost
averaging.
But there's no way of knowingwhich one was better in advance,
just like there's no way ofknowing, with your proposed
strategy of increasing from 30%to 50% within five years,
whether you're going to bebetter off with that or not.
So there are just too manyrandom factors to give that a
(16:30):
recommendation one way or theother.
Voices (16:33):
Random chance seems to have operated in our favor.
In plain, non-vulcan English,we've been lucky.
I believe I said that, doctor.
Mostly Uncle Frank (16:43):
But on the other hand, I can't say that
it's a bad process.
So if your goal is to get from30% to 50% in some reasonable
amount of time, in a reasonableway, which you proposed makes
sense to me I just don't haveany reason to suggest that it's
going to make your portfolioperform better or worse.
I would say it's a better ideathan trying to time the market
(17:08):
better or worse.
I would say it's a better ideathan trying to time the market.
Do you think anybody wants aroundhouse kick to the face
while I'm wearing these bad boys?
Forget about it, because Ithink the chances of you getting
that wrong are higher than thechances of you getting screwed
up by doing this every quarterfor five years.
And I would be interested to seeany more recent research that
anyone's got showing that thisstrategy yields significantly
(17:32):
better outcomes than simplyholding a static allocation that
gets rebalanced, because allthe research that I've seen is
simply talking about some kindof simple S&P 500 and Treasury
bond kind of portfolio, atwo-fund portfolio.
So while that's of someinterest, I don't think it's of
particular interest if you'realready having a highly
(17:52):
diversified portfolio.
So interesting questions,el-yama.
Hopefully some of my answershelped.
I look forward to your futuredonation to the Father McKenna
Center and thank you for youremail.
Second off, second off.
(18:20):
We have an email from Graham,and Graham writes.
Mary and Voices (18:30):
Hi Frank, I've listened to the first several
episodes and I'm really enjoyingthe podcast.
It's my commute educationnowadays.
Have you ever heard of Plato,aristotle, socrates?
Thanks to you, I've begunplaying about on
PortfolioVisualizercom and itwas eye-opening.
Thanks to you, I've begunplaying about on
PortfolioVisualizercom and itwas eye-opening.
In the past I've alwayswondered why anyone would buy
(18:50):
bonds when clearly stocks give afar greater return.
But now I'm in retirement and asimple test, like you've done
in the sample portfolios, with asmall withdrawal each month,
shows that a simple 100% S&P 500, eg VOO, would fail
catastrophically if one retiredaround 2000 to 2003,.
(19:11):
And probably the GFC would havealso been a bad time to start,
and it seems to me that's thereal reason for diversification.
Voices (19:18):
You are correct, sir.
Yes.
Mary and Voices (19:21):
I've always been a hold 100% individual
stocks investor, and this changein mindset towards bonds and
gasp gold is a hard change toundertake.
This is gold, mr Bond, not justmentally, but also financially
in non-tax sheltered accounts.
Still, I've learned a lot andwill keep listening, yours
(19:42):
Graham.
Voices (19:44):
We had the tools, we had talent.
Mostly Uncle Frank (19:47):
Well, I'm glad you're enjoying the podcast
, graham.
Yeah, I think what you'reexperiencing is what goes on
every time.
There is a long period wherethe stock market is just
outperforming and the downturnsare short and sweet, which is it
becomes very popular to justsay, well, I'll just keep 100%
(20:08):
equities and I'll be fine nomatter what happens.
And that could be true undertwo circumstances One, that
you're just accumulating and youhave a very long time period to
wait, and the second one isyou're just not spending much
money if you're talking aboutusing a retirement portfolio.
Voices (20:27):
What's with you?
Anyway, I can't help it.
I'm a greedy slob.
It's my hobby.
Mostly Uncle Frank (20:33):
Because the truth is, because a safe
withdrawal rate is a worst-casescenario, in most cases you can
hold a 100% stock portfolio andbe fine in retirement most of
the time.
Surely, you can't be serious.
I am serious and don't call meShirley.
Even if you're taking over 4%,even if you're taking 5%, now
(20:57):
when does that fail?
When does that not work verywell?
It doesn't work very well ifthe next period is essentially a
decade-long downturn withmultiple drops, and the last
time we had one of those wasstarting the end of 1999, in the
first decade of this century,and there was an older one back
(21:18):
in the 70s and obviously therewas one back in the 30s.
But if you're really planningfor worst-case scenarios, that
is what you're planning for.
The other common misconceptionthat you are getting rid of now
is the idea that the bestportfolio for accumulation is
necessarily the best portfoliofor decumulation.
Mary and Voices (21:40):
That's not how it works.
That's not how any of thisworks.
Mostly Uncle Frank (21:44):
Because there's a big difference in the
way a portfolio performs ifyou're putting money into it
versus taking money out of it.
And when you start taking moneyout of it, all of a sudden you
care a whole lot more about theoverall volatility of the
portfolio, and not only thelength of drawdowns, but also
how steep the drawdowns aregoing to be, because those are
(22:05):
the two things that are thekillers the steep drawdowns and
the length of drawdowns, and theway you get around those, the
way you ameliorate that problem,is through diversification into
things that are not stocks,starting with treasury bonds and
including things like gold.
And so no, you do not buy bondsfor their returns.
Forget about it.
(22:26):
If you're doing that, you'rekind of foolish or you're taking
a whole lot of risk on somevery high-yield bonds.
Mary and Voices (22:34):
That's not an improvement.
Mostly Uncle Frank (22:36):
The reason you buy bonds in a mostly stock
portfolio is for theirdiversification properties.
So then the next question iswhich ones are the most
diversified from your stocks?
And they happen to be treasurybonds.
The same thing with gold.
You do not buy gold for itsappreciation, because you know
that, over the long term, stockswill appreciate more than gold.
The reason you're buying it isfor its diversification
(22:57):
properties.
So if you haven't done italready, I'd go back and listen
to some of those initialepisodes about bonds, which are
episodes 14, 16, 64, and 69.
And also you might want tolisten to the episodes about
gold, which are episodes 12 and40.
Because what we are trying to dohere is to maximize our ability
(23:19):
to spend money out of aportfolio in retirement, which
boils down to trying to maximizethe safe withdrawal rate.
That is why we are holding adiversified portfolio, for no
other reason.
If we wanted to accumulate themost money, we would not hold
those kind of portfolios.
Instead, we would spend aslittle as possible, keep all our
money in equities, and then wewould die with the most money as
(23:41):
possible, and then we would winthat game, that golden coffin
game, where you have to die withthe most money possible.
That is facilitated best by notspending money.
Not spending money.
That's the important thing.
Don't spend your retirementmoney.
Whatever you do, don't spend iton anything Not on your friends
, not on your family, not onyourself.
Voices (24:04):
You no longer love me?
When have I ever said that?
In words?
Never.
Well, in what, then?
In the way you have changed.
But how have I changed towardsyou?
By changing towards the world.
Another idol has replaced me inyour heart, a golden idol.
You fear the world too much,with reason.
But I am not changed towardsyou, aren't you?
(24:27):
If you were free today, wouldyou choose a direless girl with
neither wealth nor socialstanding, you who now weigh
everything by gain to bring younothing but repentance and
regret?
You know I'm right, then I mustbow to your conviction that you
are.
May you be happy in the lifeyou have chosen.
(24:47):
Thank you, I shall be.
Mostly Uncle Frank (24:51):
Then you hold 90 to 100% in equities and
then you will win that game.
You'll die with the most moneypossible.
You'll have a nice goldencoffin and I'm sure you'll have
wonderful estate planningdocuments to go with that.
I would spend a little money onthat and that should work fine
as long as you're spending 3% orless of your portfolio.
(25:12):
Now if you do want to spendmore 4%, 5%, maybe even more
than that, if you're older, thenyou probably want to have a
diversified portfolio like theones we talk about here.
But it does all come down togoals.
Make sure that your behavioractually matches your stated
goals.
That is the biggest problem Isee in personal finance these
(25:34):
days.
People say they have a goal Iwant to enjoy my retirement and
then they behave as if they havea different goal, which is not
to enjoy their money inretirement, it's to hoard it and
die with the most money aspossible.
Make sure your behavior ismatching your goals, because
that dictates what kind ofportfolio you want to hold.
(25:54):
So I'm glad you're listening.
I'm glad you're getting thememo.
I hope more people get the memo.
Voices (26:02):
Did you?
Mary and Voices (26:02):
see the memo about this.
Mostly Uncle Frank (26:05):
And I'm glad you're using the tools.
You're using PortfolioVisualizer.
I'd also use Portfolio Chartsto model things, and now we have
the new Testfolio Calculator toalso model things, because it's
important to model yourportfolio against another
portfolio, and you should alwaysbe comparing portfolios,
(26:26):
because that's the question is,which one is better than the
other one for the particularpurpose.
Didn't you get that memo.
So use those tools, use yourtalents.
Voices (26:38):
We had the tools, we had talent.
Mostly Uncle Frank (26:42):
And I think you'll arrive the same
conclusions that most of mylisteners arrive at, which is
that if you want to spend moremoney in retirement, then you
better have a portfolio thatallows you to do that, and I'll
go ahead and make sure you getanother copy of that memo.
So I'm glad you're enjoying thepodcast and thank you for your
email.
Voices (27:02):
One time I turned into a dog and they helped me.
Thank you.
Mostly Uncle Frank (27:08):
Last off.
Last off, an email from James.
Mary and Voices (27:14):
It's worse than that.
Dad Jim, dad, jim, dad, jim.
It's worse than that.
Dad Jim, dad Jim, dad Jim.
Mostly Uncle Frank (27:21):
And James writes Hi Frank.
Mary and Voices (27:24):
I wanted to share this podcast clip from Meb
Faber's show where his guestBrian Jacobs offers some
insightful critiques of the CapeRay Show.
Big credit to Meb for beingopen to discussing challenges to
the Cape Ray Show, especiallygiven that he's been a strong
advocate and even wrote a bookon using it for investment
signals.
Thank you, james.
Voices (27:44):
It's life, jim, but not as we know it, not as we know it
, not as we know it.
It's life, jim, but not as weknow it, not as we know it,
james.
Mostly Uncle Frank (27:51):
Yes, this was a nice discussion you've
linked to with Brian Jacobs ofAptis Financial, who runs a
number of interesting funds.
I'll try to link to thisdirectly in the show notes.
It comes towards the end of thepodcast at around minute 28,.
I believe is where it starts,but I thought this was a good
discussion of kind of thecurrent state of the discussion
(28:14):
about the use of CAPE ratios andvaluation ratios in trying to
predict things.
Mary and Voices (28:20):
A crystal ball can help you, it can guide you.
Mostly Uncle Frank (28:25):
Because this was a very popular thing to try
to do from, say, about 2010 toabout 2016.
By the time we got to about2016 or 2017, most people had
recognized that this method wasactually a failure and it did
not predict future returns likethey thought it would.
Mary and Voices (28:45):
It doesn't work for me.
Mostly Uncle Frank (28:47):
And that has only been borne out by the past
10 years of history, because infact, even though people
thought Cape ratios were toohigh in, say, 2013, we've had
one of the best performances bythe stock market in history
after that.
So obviously that methodologyjust doesn't work.
Voices (29:04):
Okay turn it on Ow Ow, ow, ow, ow, ow Ow, ow, ow, ow Ow
Ow Ow Ow, ow, ow Ow Ow.
Mostly Uncle Frank (29:19):
Ow, Ow Ow.
It's a piece of crap.
It doesn't work.
Voices (29:24):
I could have told you that.
Mostly Uncle Frank (29:27):
And if it does work in the future, it'll
be more of a random event.
So it's no better than justobserving that you're going to
have a big crash on average oncea decade, and probably a
smaller crash or two also once adecade.
So what people at least thepeople that are informed now
talk about is not whether itworks or not.
(29:48):
Everybody knows it doesn't work.
Not going to do it Wouldn't beprudent at this juncture.
What is really discussed now iswhy doesn't it work?
And he points out a number ofdeficiencies with it, that your
P and your E are actuallycomparing different things,
among other problems.
But I just go with what Oswaldde Moteren says about trying to
(30:12):
use valuation metrics to makemarket predictions, which is
he's found the same thing thatit does not work for really
decision-making and investing.
It only really works inhindsight and for academic
purposes.
I think the better approach tothis is to think about well, why
(30:32):
does the stock market have ahigher CAPE ratio at one time
versus another?
And it basically has to do withhow well the growth stocks in
the overall market are doing.
Because when the market is goingup significantly, the growth
stocks are outperforming thevalue stocks, and then, when the
market crashes, the valuestocks outperform the growth
(30:54):
stocks, and so the easiest wayto take advantage of that
without having to predictanything is to separate your
stocks into growth and value,and then you rebalance them, and
so you take advantage of therebalancing bonus you can get,
and that way you don't have topredict anything.
Wow, it's very nice, but thatalso tells you that why holding
(31:18):
just a cap-weighted marketportfolio is probably not in
your best interest, at least ifyou're talking about retirement,
because you're not going to beable to take advantage of this
rebalancing bonus if all of yourstocks are in cap-weighted
funds like that, because they'regoing to become larded with
growth stocks as the stockmarket goes up, and then
(31:41):
there'll be nothing to rebalanceit with, like a value fund,
when the market crashes.
The last time we saw this was in2022, when growth stocks were
down 30 to 40 percent in mostcases, whereas value stocks were
anywhere from minus 10 to plus10 in terms of their performance
, and that huge disparity inperformance gave a great
(32:04):
rebalancing opportunity that youcould then sell the value
stocks at some point during thatyear hopefully at the end of
the year if you were luckyenough to schedule that buy more
of the growth stocks, and then,when the market turned around
and the growth stocksoutperformed the value stocks,
you got a rebalancing bonus outof it, and so I think that's the
best way to use valuationmetrics is to segregate your
(32:27):
portfolio and take advantage ofthis natural occurrence, as
opposed to trying to guesswhether the stock market's going
to go up or down based on howvaluations are looking today.
Mary and Voices (32:40):
Now you can also use the ball to connect to
the spirit world.
Mostly Uncle Frank (32:45):
Because that methodology has just been a
failure, a really big one here,which is huge.
So thank you for the link.
I'll make sure it's in the shownotes and thank you for your
email.
Voices (33:00):
Now we're going to do something extremely fun.
Mostly Uncle Frank (33:04):
And the extremely fun thing we get to do
now Is our weekly portfolioreviews.
Of the eight sample portfoliosyou can find at
wwwriskpartyweavercom.
On the portfolios page.
As I mentioned at the beginningof the show, the basic stock
market indexes were down thispast week.
On the portfolios page as Imentioned at the beginning of
the show, the basic stock marketindexes were down this past
week.
Gold was up again and justabout everything else was
(33:25):
actually a little bit better offthan it had been earlier in the
month.
Going through the rundown, theS&P 500, represented by VOO, is
down 9.88% for the year.
Right now.
The NASDAQ, represented by thefund QQQ, is down 13% for the
year.
Small cap value, represented bythe fund VIOV, is down 18.77%
(33:49):
for the year, but was actuallyup a little bit last week.
Gold set a new record.
Representative fund GLDM is up26.52% for the year.
Voices (34:00):
I love gold.
Mostly Uncle Frank (34:04):
Long-term treasury bonds, represented by
the fund VGLT, are up 1.55% forthe year.
So, despite all of the sturmand drang about bonds this year,
they're kind of just sittingthere gaining a little bit about
bonds.
This year they're kind of justsitting there gaining a little
bit.
Reits, represented by the fundREET, are down 0.65% for the
year and that's an interestingallocation because obviously you
(34:27):
can see how much different thatperformance is compared to the
overall stock market.
So if you have an allocation tothat, you're going to end up
getting a rebalancing bonus outof that if that continues to
your rebalancing date.
Commodities, represented by thefund PDBC, are down 0.77% for
the year.
Preferred shares, representedby the fund PFFV, are down 1.34%
(34:51):
for the year and managedfutures, represented by the fund
DBMF, are down 3.26% for theyear, and all those actually
improved a little bit last week.
Now moving to our sampleportfolios.
First one's a referenceportfolio called the All Seasons
.
It's only 30% in stocks in atotal stock market fund VTI, 55%
(35:14):
in intermediate and long-termtreasury bonds and the remaining
15% in gold and commodities.
It is down 2.70% month to date.
It's down 0.13% year to dateand up 8.42% since inception in
July 2020.
Moving to these kind of breadand butter portfolios.
(35:35):
First one's gold and butterfly.
This one's 40% in stocksdivided into a total stock
market fund and a small capvalue fund, 40% in treasury
bonds divided into long andshort, and 20% in gold.
It's down 1.94% month to date.
It's up 0.19% year to date andup 34.17% since inception in
(35:58):
July 2020.
In case you're scoring at home,the gold allocation has
actually risen over 25% of thisportfolio, even though we've
been taking some distributionsout of gold along the way.
So there'll be some significantrebalancing when it gets time
to do that in July.
Next one's golden ratio thisone's 42% in stocks divided into
(36:18):
a large cap growth fund and asmall cap value fund, 26% in
bonds long-term treasury bonds16% in gold, 10% in a managed
futures fund and 6% in a moneymarket fund or cash.
It is down 2.53% month-to-date.
It's down 2.56% year-to-date.
(36:39):
So it's all been this month andup 26.63% since inception in
July 2020.
Next one's the risk parityultimate.
I won't go through all 14 ofthese funds, but it's down 3.43%
month-to-date.
It's down 2.78% year-to-date,but up 17.77% since inception in
(37:02):
July 2020.
Now moving to theseexperimental portfolios.
These all involved leveredfunds and they're highly
volatile, so don't try this athome.
Well, you have a gamblingproblem.
Well, you have a gamblingproblem.
First one's the AcceleratedPermanent Portfolio.
This one is 27.5% in a leveredbond fund TMF.
(37:24):
It is 25% in a levered stockfund UPRO, 25% in PFFV, a
preferred shares fund, and 22.5%in gold GLDM.
It is down 6.63% month to dateand down 2.91% year to date and
(37:44):
down 1.91% since inception inJuly 2020.
It's interesting it just misseda rebalancing last week.
We check it on the 15th and thestock fund was not down quite
enough to trigger a rebalancing.
It actually is down enough totrigger a rebalancing now.
It's only 16.8% of the fund,but we only check it once a
(38:06):
month, on the 15th, so we'll bechecking it again next month to
see where it is.
Next one's the aggressive 50-50.
This is the least diversifiedand most levered of these funds
and also the worst performer dueto that lack of diversification
.
So it's one-third in a leveredstock fund UPRO year-to-date and
(38:39):
down 22.44% since inception inJuly 2020.
It is also close to arebalancing due to the lagging
stock fund there.
Next one's the levered goldenratio.
This one's a year younger thanthe other ones.
This one is 35% in a compositefund called NTSX that's the S&P
(39:00):
500, and treasury bonds leveredup 1.5 to 1.
20% in gold GLDM 15% in ainternational small cap value
fund, avdv, 10% in KMLM, amanaged futures fund, 10% in TMF
, a levered treasury bond fund,and the remaining 10% divided
(39:21):
into UDOW and UTSL, which arelevered Dow fund and levered
utilities fund.
It is down 3.38% month-to-date.
It's down 1.04% year-to-date,so almost flat and down 5.42%
since inception in July 2021.
It had a very inauspiciousstart date, given what happened
(39:45):
in 2022.
And the last one is ourreturn-stacked portfolio, the
Optra portfolio.
This one is 16% in UPRO, alevered stock fund, 24% in AVGV,
which is a worldwide value fund, 24% in GOVZ, which is a
(40:06):
treasury strips fund, and theremaining 36% divided into gold
and managed futures.
It is down 4.36% month to date.
It's down 3.38-to-date and down0.56% since inception in July
2024.
Now this portfolio is intendedto have the same kind of risk
(40:27):
profile as the total stockmarket VOO or QQQ.
Voo is down about 2.56% sincelast July and QQQ is down 7.44%
since last July.
So since this one's only down0.56%, I'd have to call it a
(40:50):
success for the past nine monthsat least, and that is truly
just noise, but fun to look atanyway.
Voices (40:58):
I'm funny how I mean funny, like I'm a clown, I amuse
you at least, and that is trulyjust noise, but fun to look at
anyway.
Mostly Uncle Frank (41:02):
I'm funny how I mean funny like I'm a
clown.
I amuse you, but now I see oursignal is beginning to fade.
Happy Easter.
If you celebrate Easter, we'regoing to be having some cousins
and their children over, so weintend to have a happy Easter
Going to be out there grillingthe meats.
Looks like Dad is bringing homethe barbecue.
(41:22):
But in the meantime, if youhave comments or questions for
me, please send them to frank atriskparityradarcom and email us
, frank at riskparityradarcom,or you can go to the website,
wwwriskparityradarcom, put yourmessage into the contact 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.
(41:43):
Give me some stars, follow orreview.
That would be great, okay,thank you once again for tuning
in.
This is Frank Vasquez with RiskParity Radio.
Voices (42:26):
Signing off.
La, la, la, la, la la.
Mary and Voices (42:39):
The Risk Parody Radio Show is hosted by Frank
Vasquez.
The content provided is forentertainment and informational
purposes only and does notconstitute financial, investment
tax or legal advice.
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 little statesmen andphilosophers and divines.
If a man does not keep pacewith his companions, perhaps it
is because he hears a differentdrummer.
Mary and Voices (00:17):
A different drummer and now, coming to you
from dead center on your dial,welcome to Risk Parity Radio,
where we explore alternativesand asset allocations 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 (00:38):
Thank you, Mary, and welcome to Risk Parity
Radio.
If you have just stumbled inhere, you will find that this
podcast is kind of like a divebar of personal finance and
do-it-yourself investing.
Voices (00:53):
Expect the unexpected.
Mostly Uncle Frank (00:56):
It's a relatively small place.
It's just me and Mary in hereand we only have a few
mismatched bar stools and someeasy chairs.
We have no sponsors, we have noguests and we have no expansion
plans.
Voices (01:12):
I don't think I'd like another job.
Mostly Uncle Frank (01:15):
There are basically two kinds of people
that like to hang out in thislittle dive bar.
Voices (01:19):
You see, in this world there's two kinds of people.
Mostly Uncle Frank (01:22):
my friend, the smaller group are those who
actually think the host is funny, regardless of the content of
the podcast.
Voices (01:31):
Funny how?
Mostly Uncle Frank (01:32):
How am I funny?
These include friends andfamily and a number of people
named Abby.
Voices (01:40):
Abby, someone Abby who Abby, normal Abby, someone Abby
who Abby normal, abby normal.
Mostly Uncle Frank (01:48):
The larger group includes a number of
highly successful do-it-yourselfinvestors, many of whom have
accumulated multi-million dollarportfolios over a period of
years.
Voices (02:02):
The best, Jerry the best .
Mostly Uncle Frank (02:05):
And they are here to share information and
to gather information to helpthem continue managing their
portfolios as they go forward,particularly as they get to
their distribution ordecumulation phases of their
financial life.
Voices (02:23):
What we do is, if we need that extra push over the
cliff, you know what we do Putit up to 11.
11, exactly.
Mostly Uncle Frank (02:31):
But whomever you are, you are welcome here.
Voices (02:35):
I have a feeling we're not in Kansas anymore.
Mostly Uncle Frank (02:39):
But now onward, episode 416.
Today on Risk Parity Radio,it's time for our weekly
portfolio review.
So the eight sample portfoliosyou can find at
wwwriskparityradiocom on theportfolios page.
Boring, yeah, it is kind ofboring.
Actually, it's the same storyevery week.
(03:01):
Us stock market goes down, goldgoes up.
Voices (03:06):
You're insane gold member.
Mostly Uncle Frank (03:09):
Everything else kind of goes up and down.
Voices (03:12):
And that's the way.
Uh-huh, uh-huh, I like it.
Kc on the sunshine band.
Mostly Uncle Frank (03:18):
So I think the only excitement we have to
look forward to will be therebalancings in July.
Voices (03:23):
That is the straight stuff.
Oh funk master.
But before we get to that, I'mintrigued by this how you say
Emails.
Mostly Uncle Frank (03:35):
And First off.
First off, we have an emailfrom El Yama.
This looks like a long one,mayor, mary Mary, why you
buggin' Yama?
This looks like a long one,mare.
Mary and Voices (03:52):
And El Yama writes Hello Uncle Frank and
Aunt Mary, Long time listener,first time caller, although you
have had to spank me a few timeson the ChooseFI Facebook group.
Bow to your sensei.
Mostly Uncle Frank (04:05):
Bow to your sensei.
Mary and Voices (04:07):
I am an American physician assistant
with a Japanese wife and nowliving in Germany for the past
nine years raising myGerman-born children.
Alles klar, herr Kommissar Not?
Voices (04:19):
complicated at all right .
Mary and Voices (04:32):
I have been working mostly for the US
military for the past 15 years,providing health care for active
duty service members.
Voices (04:36):
What kind of training son?
Army training sir.
Army training sir.
Mary and Voices (04:42):
But I've finally saved enough to call it
quits.
At 41 years old, I've averagedabout $100,000 per year.
Over those years, Despite doingdumb things like market timing
and being way too conservative,I've managed to get to 20 times
my expenses yes, only 20 timesversus the recommended 25.
As I mentioned, I have twoyoung sons whom I absolutely
(05:06):
adore, and now that one isschool age, I refuse to
sacrifice time away from him.
I like doing the little things,like walking him to and picking
him up from school.
I think as parents, you canappreciate that the love for
your boys definitely comesthrough in the podcast.
I have been poor my whole lifegrowing up, and I'm currently at
my highest net worth.
(05:26):
I tend to be more on theconservative side with my
investments.
I will hopefully have a seriesof emails to the podcast, but
not so as to inundate you, solet me start with a couple.
First off, you commonlymentioned that some portfolios,
like Golden Butterfly etc.
Are good intermediate termportfolios.
Do you mean they are also goodintermediate term portfolios or
(05:49):
only good as intermediate termportfolios?
Could one hold it forever withits default AA, Speaking of
which you commonly mention thathaving more than 10% cash will
create a drag on a portfolio, sodon't recommend it.
Yet the golden butterfly has20% and does well in backtesting
and Monte Carlo simulations.
So which is it?
(06:11):
Second off, we will likely bereceiving about 500 euros per
month from the German governmentto help pay for the costs of
raising children for the next 20years.
Not only does it help reducecurrency risk, since it is in
euros, it is a nice cash flow tolook forward to.
My question is how do Iincorporate this money?
It really doesn't adjust forinflation, so the total value is
(06:34):
about 120,000 euros.
Should I add that to my currentnet worth of 800,000 and then
change my AA to match it usingthis money as the cash portion
920,000 versus 800,000, or justreduce the amount of expenses
I'll need to cover by 500 eurosa month?
Last off, I respect you and afew other personal finance gurus
(06:57):
, namely Michael Kitsis, WadePfau, Karsten Jeske and Bill
Bengen.
A couple of them recommend arising equity glide path to help
reduce SORR and improve SWR.
What is your take?
I currently have about 30%equities and want to get 50%
over the next five years.
I would add about 1% everyquarter.
(07:19):
This also helps me with nottiming the market.
I would have the contributionson a set schedule.
That is all for now.
I'm sorry you had to read allof this, Mary.
Mostly Uncle Frank (07:30):
Mary, Mary, I need your huggin'.
Mary and Voices (07:39):
Please let me know if you're ever in Germany.
The first beer is on me ProstPS.
Thank you for the work you dowith the Father McKenna Center.
As someone who has beentemporarily homeless and had
food scarcity a few times in mylife, I really appreciate those
efforts and will be a futuredonor.
Ali Dibesti Eliema.
Mostly Uncle Frank (08:07):
Well, first, congratulations for getting out
of poverty, and alsocongratulations for having your
head screwed on straight as towhat is most important in life,
because it certainly ain't agolden coffin.
Voices (08:20):
As human beings, you and I need fresh, pure water to
replenish our precious bodilyfluids.
Are you beginning to understand?
Mostly Uncle Frank (08:30):
Yes, All right, going to your questions
in turn.
Your first question was aboutmy statement that these kinds of
portfolios, like the golden orGolden Ratio, are good
intermediate term portfolios,and I mean that to say that they
are also good as intermediateterm portfolios.
(08:52):
So if you have a long-termportfolio that is close to 100%
equities for long-termaccumulation and then you might
have some short-term emergencyfund money and cash In between
that, you can have a risk paritystyle portfolio for these kind
of intermediate term needs, andthat's what our adult children
(09:16):
actually do.
So, for instance, when oureldest wanted to put solar
panels on his house, he justdipped into this intermediate
term portfolio, which is like agolden ratio kind of thing.
The reason these work well forthat is because their maximum
drawdown time is generally threeor four years, so the chances
are you're always going to havesomething that you can pull from
(09:39):
.
So the way they work this isfirst they make all of their
long-term contributions I'mtalking about our adult children
Then they have an emergencyfund that they fill up and then
any money after that goes intothis intermediate-term portfolio
, which they can then use forany big expenses that come along
(09:59):
the way.
Now your sub-question was couldyou hold a portfolio like this
forever with its default assetallocation?
And the answer is yes.
Actually, the originator of theGolden Butterfly portfolio,
tyler, over at Portfolio Charts,just uses his also as his
accumulation portfolio.
I think he's passed that by now.
I know that the value stockgeek uses his weird portfolio as
(10:23):
an accumulation portfolio andthey plan to just keep that, and
the reason they like it isbecause they don't want the
volatility in accumulation, eventhough they know it's going to
slow them down.
I think there's a guy namedJared Dillian who has something
called the awesome portfolio,which is another portfolio like
this, and he makes his moneywriting newsletters and books
(10:44):
and things, but he wants hisportfolio to be relatively
stable, since his income is notstable, and so he uses a risk
parity style portfolio as hisbaseline accumulation portfolio
and plans to just keep it atthat long-term.
Now, your second sub-questionhere was about the Golden
Butterfly's 20% allocation to ashort-term bond fund and my
(11:09):
admonition that having more than10% in cash tends to create a
drag on the portfolio over time.
I have two thoughts about it.
I do think that the GoldenButterfly is on the conservative
end of things, but recognizethat if you have a short-term
bond fund.
That's a one to three yearbonds you're talking about.
So those three years are morelike intermediate bonds than
(11:32):
short-term bonds.
But if you tweak that and takemoney out of that allocation and
put it into differentallocations, you'll see you can
get a better performingportfolio on some metrics like
the safe withdrawal rate ortotal returns, even though the
volatility is going to be moreso.
It's just a trade-off there,but it is significant that that
(11:53):
portfolio is not 20% in T-billsor HYSAs or something like that,
but actually has one to threeyear bonds involved there.
All right.
Your next question is about yourmoney from the German
government the 500 euros permonth for the cost of raising
children for the next 20 yearsDonate to the children's fund.
(12:17):
Why?
What have children?
Voices (12:19):
ever done for me.
Mostly Uncle Frank (12:21):
If you wanted to value that strictly
for like net worth purposes,yeah, you would model that as an
annuity with a 20-year lifetimewith that kind of payment over
the month, and then figure outhow much would it cost for you
to buy one of those things onthe open market, which you
actually can do over atImmediateAnnuitiescom.
(12:43):
I just don't think it'sprobably a worthwhile endeavor.
It is much easier and makes awhole lot more sense in this
circumstance to simply reduceyour expenses by that amount.
That is a more practicalsolution and it's certainly a
whole lot easier to calculate.
So, while you can model it bothways, I think it's more useful
to simply model it as areduction to overall expenses
(13:06):
and then look at what yourportfolio has to cover after
that.
The same thing is true whetherit's Social Security or pension
or any other payment stream thatyou have coming in.
All right, your third questionabout rising glide paths to help
reduce sequence of return risks.
Yeah, I did go back and take alook at the Kitsis and Wade Fowl
(13:26):
papers from 2013, where thisoriginated, and they are not
doing what you are proposingdoing, which is why I would not
do what you're proposing doing,because, as far as I know it's
never been modeled to make thatsharp of an increase in equity
allocations over a five-yearperiod and I don't think it
would work out.
What they were doing isincreasing by 1% each year over
(13:50):
a 30-year period, and that iscompletely different than
increasing by 1% every quarterover a five-year period.
That's why I would go back andread the paper I will link to it
in the show notes to seewhether that is of any interest
to you.
My experiences with this isthat, although the idea has been
around since at least 2013,almost nobody actually uses this
(14:14):
idea in practice.
That I'm aware of, and I'm notaware of any financial advisors
that base their modeling aroundan increasing glide path, I
think because psychologicallyit's unattractive, and it's also
kind of unattractive the waypeople actually spend, which is
to spend more earlier than later, although you could argue that
(14:37):
that augurs towards keeping alarger pile of cash to spend
early on.
But that was one of the moreinteresting things out of this
research is that what they werereally looking at to begin with
is whether the declining glidepath which has frequently been
recommended in all kinds ofhoary research about bonds,
equal 100 minus your age or somestupid thing like that.
(14:59):
Stupid is what stupid does, sir.
And what they found is thosestrategies actually detract from
your safe withdrawal rate, andso you should not be decreasing
your exposure to equities overtime.
And what they also observed isthat, to the extent that a
bucket strategy does anythingfor anybody, the reason has
nothing to do with buckets, butbecause it's essentially
(15:22):
mimicking one of these risingglide path ideas where people
are just spending their cashdown first, which results in
their portfolio being moreequity heavy.
Now what you are proposingactually is kind of going to be
completely determined on thefive-year period you're talking
about.
So it's going to have a highvariance as to what the outcomes
(15:43):
are.
Sort of like that questionshould I invest in a lump sum
right now or should I do it overthe next six to eight months?
And the answer to that isalmost a coin flip, because the
volatility of stock markets overthat period of time is almost a
random event.
A random event that most of thetime you're better off with the
(16:07):
lump sum investment, but in asignificant number of
circumstances you're better offwith the longer term dollar cost
averaging.
But there's no way of knowingwhich one was better in advance,
just like there's no way ofknowing, with your proposed
strategy of increasing from 30%to 50% within five years,
whether you're going to bebetter off with that or not.
So there are just too manyrandom factors to give that a
(16:30):
recommendation one way or theother.
Voices (16:33):
Random chance seems to have operated in our favor.
In plain, non-vulcan English,we've been lucky.
I believe I said that, doctor.
Mostly Uncle Frank (16:43):
But on the other hand, I can't say that
it's a bad process.
So if your goal is to get from30% to 50% in some reasonable
amount of time, in a reasonableway, which you proposed makes
sense to me I just don't haveany reason to suggest that it's
going to make your portfolioperform better or worse.
I would say it's a better ideathan trying to time the market
(17:08):
better or worse.
I would say it's a better ideathan trying to time the market.
Do you think anybody wants aroundhouse kick to the face
while I'm wearing these bad boys?
Forget about it, because Ithink the chances of you getting
that wrong are higher than thechances of you getting screwed
up by doing this every quarterfor five years.
And I would be interested to seeany more recent research that
anyone's got showing that thisstrategy yields significantly
(17:32):
better outcomes than simplyholding a static allocation that
gets rebalanced, because allthe research that I've seen is
simply talking about some kindof simple S&P 500 and Treasury
bond kind of portfolio, atwo-fund portfolio.
So while that's of someinterest, I don't think it's of
particular interest if you'realready having a highly
(17:52):
diversified portfolio.
So interesting questions,el-yama.
Hopefully some of my answershelped.
I look forward to your futuredonation to the Father McKenna
Center and thank you for youremail.
Second off, second off.
(18:20):
We have an email from Graham,and Graham writes.
Mary and Voices (18:30):
Hi Frank, I've listened to the first several
episodes and I'm really enjoyingthe podcast.
It's my commute educationnowadays.
Have you ever heard of Plato,aristotle, socrates?
Thanks to you, I've begunplaying about on
PortfolioVisualizercom and itwas eye-opening.
Thanks to you, I've begunplaying about on
PortfolioVisualizercom and itwas eye-opening.
In the past I've alwayswondered why anyone would buy
(18:50):
bonds when clearly stocks give afar greater return.
But now I'm in retirement and asimple test, like you've done
in the sample portfolios, with asmall withdrawal each month,
shows that a simple 100% S&P 500, eg VOO, would fail
catastrophically if one retiredaround 2000 to 2003,.
(19:11):
And probably the GFC would havealso been a bad time to start,
and it seems to me that's thereal reason for diversification.
Voices (19:18):
You are correct, sir.
Yes.
Mary and Voices (19:21):
I've always been a hold 100% individual
stocks investor, and this changein mindset towards bonds and
gasp gold is a hard change toundertake.
This is gold, mr Bond, not justmentally, but also financially
in non-tax sheltered accounts.
Still, I've learned a lot andwill keep listening, yours
(19:42):
Graham.
Voices (19:44):
We had the tools, we had talent.
Mostly Uncle Frank (19:47):
Well, I'm glad you're enjoying the podcast
, graham.
Yeah, I think what you'reexperiencing is what goes on
every time.
There is a long period wherethe stock market is just
outperforming and the downturnsare short and sweet, which is it
becomes very popular to justsay, well, I'll just keep 100%
(20:08):
equities and I'll be fine nomatter what happens.
And that could be true undertwo circumstances One, that
you're just accumulating and youhave a very long time period to
wait, and the second one isyou're just not spending much
money if you're talking aboutusing a retirement portfolio.
Voices (20:27):
What's with you?
Anyway, I can't help it.
I'm a greedy slob.
It's my hobby.
Mostly Uncle Frank (20:33):
Because the truth is, because a safe
withdrawal rate is a worst-casescenario, in most cases you can
hold a 100% stock portfolio andbe fine in retirement most of
the time.
Surely, you can't be serious.
I am serious and don't call meShirley.
Even if you're taking over 4%,even if you're taking 5%, now
(20:57):
when does that fail?
When does that not work verywell?
It doesn't work very well ifthe next period is essentially a
decade-long downturn withmultiple drops, and the last
time we had one of those wasstarting the end of 1999, in the
first decade of this century,and there was an older one back
(21:18):
in the 70s and obviously therewas one back in the 30s.
But if you're really planningfor worst-case scenarios, that
is what you're planning for.
The other common misconceptionthat you are getting rid of now
is the idea that the bestportfolio for accumulation is
necessarily the best portfoliofor decumulation.
Mary and Voices (21:40):
That's not how it works.
That's not how any of thisworks.
Mostly Uncle Frank (21:44):
Because there's a big difference in the
way a portfolio performs ifyou're putting money into it
versus taking money out of it.
And when you start taking moneyout of it, all of a sudden you
care a whole lot more about theoverall volatility of the
portfolio, and not only thelength of drawdowns, but also
how steep the drawdowns aregoing to be, because those are
(22:05):
the two things that are thekillers the steep drawdowns and
the length of drawdowns, and theway you get around those, the
way you ameliorate that problem,is through diversification into
things that are not stocks,starting with treasury bonds and
including things like gold.
And so no, you do not buy bondsfor their returns.
Forget about it.
(22:26):
If you're doing that, you'rekind of foolish or you're taking
a whole lot of risk on somevery high-yield bonds.
Mary and Voices (22:34):
That's not an improvement.
Mostly Uncle Frank (22:36):
The reason you buy bonds in a mostly stock
portfolio is for theirdiversification properties.
So then the next question iswhich ones are the most
diversified from your stocks?
And they happen to be treasurybonds.
The same thing with gold.
You do not buy gold for itsappreciation, because you know
that, over the long term, stockswill appreciate more than gold.
The reason you're buying it isfor its diversification
(22:57):
properties.
So if you haven't done italready, I'd go back and listen
to some of those initialepisodes about bonds, which are
episodes 14, 16, 64, and 69.
And also you might want tolisten to the episodes about
gold, which are episodes 12 and40.
Because what we are trying to dohere is to maximize our ability
(23:19):
to spend money out of aportfolio in retirement, which
boils down to trying to maximizethe safe withdrawal rate.
That is why we are holding adiversified portfolio, for no
other reason.
If we wanted to accumulate themost money, we would not hold
those kind of portfolios.
Instead, we would spend aslittle as possible, keep all our
money in equities, and then wewould die with the most money as
(23:41):
possible, and then we would winthat game, that golden coffin
game, where you have to die withthe most money possible.
That is facilitated best by notspending money.
Not spending money.
That's the important thing.
Don't spend your retirementmoney.
Whatever you do, don't spend iton anything Not on your friends
, not on your family, not onyourself.
Voices (24:04):
You no longer love me?
When have I ever said that?
In words?
Never.
Well, in what, then?
In the way you have changed.
But how have I changed towardsyou?
By changing towards the world.
Another idol has replaced me inyour heart, a golden idol.
You fear the world too much,with reason.
But I am not changed towardsyou, aren't you?
(24:27):
If you were free today, wouldyou choose a direless girl with
neither wealth nor socialstanding, you who now weigh
everything by gain to bring younothing but repentance and
regret?
You know I'm right, then I mustbow to your conviction that you
are.
May you be happy in the lifeyou have chosen.
(24:47):
Thank you, I shall be.
Mostly Uncle Frank (24:51):
Then you hold 90 to 100% in equities and
then you will win that game.
You'll die with the most moneypossible.
You'll have a nice goldencoffin and I'm sure you'll have
wonderful estate planningdocuments to go with that.
I would spend a little money onthat and that should work fine
as long as you're spending 3% orless of your portfolio.
(25:12):
Now if you do want to spendmore 4%, 5%, maybe even more
than that, if you're older, thenyou probably want to have a
diversified portfolio like theones we talk about here.
But it does all come down togoals.
Make sure that your behavioractually matches your stated
goals.
That is the biggest problem Isee in personal finance these
(25:34):
days.
People say they have a goal Iwant to enjoy my retirement and
then they behave as if they havea different goal, which is not
to enjoy their money inretirement, it's to hoard it and
die with the most money aspossible.
Make sure your behavior ismatching your goals, because
that dictates what kind ofportfolio you want to hold.
(25:54):
So I'm glad you're listening.
I'm glad you're getting thememo.
I hope more people get the memo.
Voices (26:02):
Did you?
Mary and Voices (26:02):
see the memo about this.
Mostly Uncle Frank (26:05):
And I'm glad you're using the tools.
You're using PortfolioVisualizer.
I'd also use Portfolio Chartsto model things, and now we have
the new Testfolio Calculator toalso model things, because it's
important to model yourportfolio against another
portfolio, and you should alwaysbe comparing portfolios,
(26:26):
because that's the question is,which one is better than the
other one for the particularpurpose.
Didn't you get that memo.
So use those tools, use yourtalents.
Voices (26:38):
We had the tools, we had talent.
Mostly Uncle Frank (26:42):
And I think you'll arrive the same
conclusions that most of mylisteners arrive at, which is
that if you want to spend moremoney in retirement, then you
better have a portfolio thatallows you to do that, and I'll
go ahead and make sure you getanother copy of that memo.
So I'm glad you're enjoying thepodcast and thank you for your
email.
Voices (27:02):
One time I turned into a dog and they helped me.
Thank you.
Mostly Uncle Frank (27:08):
Last off.
Last off, an email from James.
Mary and Voices (27:14):
It's worse than that.
Dad Jim, dad, jim, dad, jim.
It's worse than that.
Dad Jim, dad Jim, dad Jim.
Mostly Uncle Frank (27:21):
And James writes Hi Frank.
Mary and Voices (27:24):
I wanted to share this podcast clip from Meb
Faber's show where his guestBrian Jacobs offers some
insightful critiques of the CapeRay Show.
Big credit to Meb for beingopen to discussing challenges to
the Cape Ray Show, especiallygiven that he's been a strong
advocate and even wrote a bookon using it for investment
signals.
Thank you, james.
Voices (27:44):
It's life, jim, but not as we know it, not as we know it
, not as we know it.
It's life, jim, but not as weknow it, not as we know it,
james.
Mostly Uncle Frank (27:51):
Yes, this was a nice discussion you've
linked to with Brian Jacobs ofAptis Financial, who runs a
number of interesting funds.
I'll try to link to thisdirectly in the show notes.
It comes towards the end of thepodcast at around minute 28,.
I believe is where it starts,but I thought this was a good
discussion of kind of thecurrent state of the discussion
(28:14):
about the use of CAPE ratios andvaluation ratios in trying to
predict things.
Mary and Voices (28:20):
A crystal ball can help you, it can guide you.
Mostly Uncle Frank (28:25):
Because this was a very popular thing to try
to do from, say, about 2010 toabout 2016.
By the time we got to about2016 or 2017, most people had
recognized that this method wasactually a failure and it did
not predict future returns likethey thought it would.
Mary and Voices (28:45):
It doesn't work for me.
Mostly Uncle Frank (28:47):
And that has only been borne out by the past
10 years of history, because infact, even though people
thought Cape ratios were toohigh in, say, 2013, we've had
one of the best performances bythe stock market in history
after that.
So obviously that methodologyjust doesn't work.
Voices (29:04):
Okay turn it on Ow Ow, ow, ow, ow, ow Ow, ow, ow, ow Ow
Ow Ow Ow, ow, ow Ow Ow.
Mostly Uncle Frank (29:19):
Ow, Ow Ow.
It's a piece of crap.
It doesn't work.
Voices (29:24):
I could have told you that.
Mostly Uncle Frank (29:27):
And if it does work in the future, it'll
be more of a random event.
So it's no better than justobserving that you're going to
have a big crash on average oncea decade, and probably a
smaller crash or two also once adecade.
So what people at least thepeople that are informed now
talk about is not whether itworks or not.
(29:48):
Everybody knows it doesn't work.
Not going to do it Wouldn't beprudent at this juncture.
What is really discussed now iswhy doesn't it work?
And he points out a number ofdeficiencies with it, that your
P and your E are actuallycomparing different things,
among other problems.
But I just go with what Oswaldde Moteren says about trying to
(30:12):
use valuation metrics to makemarket predictions, which is
he's found the same thing thatit does not work for really
decision-making and investing.
It only really works inhindsight and for academic
purposes.
I think the better approach tothis is to think about well, why
(30:32):
does the stock market have ahigher CAPE ratio at one time
versus another?
And it basically has to do withhow well the growth stocks in
the overall market are doing.
Because when the market is goingup significantly, the growth
stocks are outperforming thevalue stocks, and then, when the
market crashes, the valuestocks outperform the growth
(30:54):
stocks, and so the easiest wayto take advantage of that
without having to predictanything is to separate your
stocks into growth and value,and then you rebalance them, and
so you take advantage of therebalancing bonus you can get,
and that way you don't have topredict anything.
Wow, it's very nice, but thatalso tells you that why holding
(31:18):
just a cap-weighted marketportfolio is probably not in
your best interest, at least ifyou're talking about retirement,
because you're not going to beable to take advantage of this
rebalancing bonus if all of yourstocks are in cap-weighted
funds like that, because they'regoing to become larded with
growth stocks as the stockmarket goes up, and then
(31:41):
there'll be nothing to rebalanceit with, like a value fund,
when the market crashes.
The last time we saw this was in2022, when growth stocks were
down 30 to 40 percent in mostcases, whereas value stocks were
anywhere from minus 10 to plus10 in terms of their performance
, and that huge disparity inperformance gave a great
(32:04):
rebalancing opportunity that youcould then sell the value
stocks at some point during thatyear hopefully at the end of
the year if you were luckyenough to schedule that buy more
of the growth stocks, and then,when the market turned around
and the growth stocksoutperformed the value stocks,
you got a rebalancing bonus outof it, and so I think that's the
best way to use valuationmetrics is to segregate your
(32:27):
portfolio and take advantage ofthis natural occurrence, as
opposed to trying to guesswhether the stock market's going
to go up or down based on howvaluations are looking today.
Mary and Voices (32:40):
Now you can also use the ball to connect to
the spirit world.
Mostly Uncle Frank (32:45):
Because that methodology has just been a
failure, a really big one here,which is huge.
So thank you for the link.
I'll make sure it's in the shownotes and thank you for your
email.
Voices (33:00):
Now we're going to do something extremely fun.
Mostly Uncle Frank (33:04):
And the extremely fun thing we get to do
now Is our weekly portfolioreviews.
Of the eight sample portfoliosyou can find at
wwwriskpartyweavercom.
On the portfolios page.
As I mentioned at the beginningof the show, the basic stock
market indexes were down thispast week.
On the portfolios page as Imentioned at the beginning of
the show, the basic stock marketindexes were down this past
week.
Gold was up again and justabout everything else was
(33:25):
actually a little bit better offthan it had been earlier in the
month.
Going through the rundown, theS&P 500, represented by VOO, is
down 9.88% for the year.
Right now.
The NASDAQ, represented by thefund QQQ, is down 13% for the
year.
Small cap value, represented bythe fund VIOV, is down 18.77%
(33:49):
for the year, but was actuallyup a little bit last week.
Gold set a new record.
Representative fund GLDM is up26.52% for the year.
Voices (34:00):
I love gold.
Mostly Uncle Frank (34:04):
Long-term treasury bonds, represented by
the fund VGLT, are up 1.55% forthe year.
So, despite all of the sturmand drang about bonds this year,
they're kind of just sittingthere gaining a little bit about
bonds.
This year they're kind of justsitting there gaining a little
bit.
Reits, represented by the fundREET, are down 0.65% for the
year and that's an interestingallocation because obviously you
(34:27):
can see how much different thatperformance is compared to the
overall stock market.
So if you have an allocation tothat, you're going to end up
getting a rebalancing bonus outof that if that continues to
your rebalancing date.
Commodities, represented by thefund PDBC, are down 0.77% for
the year.
Preferred shares, representedby the fund PFFV, are down 1.34%
(34:51):
for the year and managedfutures, represented by the fund
DBMF, are down 3.26% for theyear, and all those actually
improved a little bit last week.
Now moving to our sampleportfolios.
First one's a referenceportfolio called the All Seasons
.
It's only 30% in stocks in atotal stock market fund VTI, 55%
(35:14):
in intermediate and long-termtreasury bonds and the remaining
15% in gold and commodities.
It is down 2.70% month to date.
It's down 0.13% year to dateand up 8.42% since inception in
July 2020.
Moving to these kind of breadand butter portfolios.
(35:35):
First one's gold and butterfly.
This one's 40% in stocksdivided into a total stock
market fund and a small capvalue fund, 40% in treasury
bonds divided into long andshort, and 20% in gold.
It's down 1.94% month to date.
It's up 0.19% year to date andup 34.17% since inception in
(35:58):
July 2020.
In case you're scoring at home,the gold allocation has
actually risen over 25% of thisportfolio, even though we've
been taking some distributionsout of gold along the way.
So there'll be some significantrebalancing when it gets time
to do that in July.
Next one's golden ratio thisone's 42% in stocks divided into
(36:18):
a large cap growth fund and asmall cap value fund, 26% in
bonds long-term treasury bonds16% in gold, 10% in a managed
futures fund and 6% in a moneymarket fund or cash.
It is down 2.53% month-to-date.
It's down 2.56% year-to-date.
(36:39):
So it's all been this month andup 26.63% since inception in
July 2020.
Next one's the risk parityultimate.
I won't go through all 14 ofthese funds, but it's down 3.43%
month-to-date.
It's down 2.78% year-to-date,but up 17.77% since inception in
(37:02):
July 2020.
Now moving to theseexperimental portfolios.
These all involved leveredfunds and they're highly
volatile, so don't try this athome.
Well, you have a gamblingproblem.
Well, you have a gamblingproblem.
First one's the AcceleratedPermanent Portfolio.
This one is 27.5% in a leveredbond fund TMF.
(37:24):
It is 25% in a levered stockfund UPRO, 25% in PFFV, a
preferred shares fund, and 22.5%in gold GLDM.
It is down 6.63% month to dateand down 2.91% year to date and
(37:44):
down 1.91% since inception inJuly 2020.
It's interesting it just misseda rebalancing last week.
We check it on the 15th and thestock fund was not down quite
enough to trigger a rebalancing.
It actually is down enough totrigger a rebalancing now.
It's only 16.8% of the fund,but we only check it once a
(38:06):
month, on the 15th, so we'll bechecking it again next month to
see where it is.
Next one's the aggressive 50-50.
This is the least diversifiedand most levered of these funds
and also the worst performer dueto that lack of diversification
.
So it's one-third in a leveredstock fund UPRO year-to-date and
(38:39):
down 22.44% since inception inJuly 2020.
It is also close to arebalancing due to the lagging
stock fund there.
Next one's the levered goldenratio.
This one's a year younger thanthe other ones.
This one is 35% in a compositefund called NTSX that's the S&P
(39:00):
500, and treasury bonds leveredup 1.5 to 1.
20% in gold GLDM 15% in ainternational small cap value
fund, avdv, 10% in KMLM, amanaged futures fund, 10% in TMF
, a levered treasury bond fund,and the remaining 10% divided
(39:21):
into UDOW and UTSL, which arelevered Dow fund and levered
utilities fund.
It is down 3.38% month-to-date.
It's down 1.04% year-to-date,so almost flat and down 5.42%
since inception in July 2021.
It had a very inauspiciousstart date, given what happened
(39:45):
in 2022.
And the last one is ourreturn-stacked portfolio, the
Optra portfolio.
This one is 16% in UPRO, alevered stock fund, 24% in AVGV,
which is a worldwide value fund, 24% in GOVZ, which is a
(40:06):
treasury strips fund, and theremaining 36% divided into gold
and managed futures.
It is down 4.36% month to date.
It's down 3.38-to-date and down0.56% since inception in July
2024.
Now this portfolio is intendedto have the same kind of risk
(40:27):
profile as the total stockmarket VOO or QQQ.
Voo is down about 2.56% sincelast July and QQQ is down 7.44%
since last July.
So since this one's only down0.56%, I'd have to call it a
(40:50):
success for the past nine monthsat least, and that is truly
just noise, but fun to look atanyway.
Voices (40:58):
I'm funny how I mean funny, like I'm a clown, I amuse
you at least, and that is trulyjust noise, but fun to look at
anyway.
Mostly Uncle Frank (41:02):
I'm funny how I mean funny like I'm a
clown.
I amuse you, but now I see oursignal is beginning to fade.
Happy Easter.
If you celebrate Easter, we'regoing to be having some cousins
and their children over, so weintend to have a happy Easter
Going to be out there grillingthe meats.
Looks like Dad is bringing homethe barbecue.
(41:22):
But in the meantime, if youhave comments or questions for
me, please send them to frank atriskparityradarcom and email us
, frank at riskparityradarcom,or you can go to the website,
wwwriskparityradarcom, put yourmessage into the contact 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.
(41:43):
Give me some stars, follow orreview.
That would be great, okay,thank you once again for tuning
in.
This is Frank Vasquez with RiskParity Radio.
Voices (42:26):
Signing off.
La, la, la, la, la la.
Mary and Voices (42:39):
The Risk Parody Radio Show is hosted by Frank
Vasquez.
The content provided is forentertainment and informational
purposes only and does notconstitute financial, investment
tax or legal advice.
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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