In this episode we answer emails from Brent, Peter and Cy. We discuss our Father McKenna Center Top-of-the-T-Shirt Matching Campaign (again), Peter's risk-parity style portfolio in retirement and what to do with new cash coming in, and Cy's small cap value direct indexing experiment.
If you'd like to support the Father McKenna Center and get your questions answered on the show, please donate through the link in the show notes. Every dollar will be doubled through our matching campaign.
Links:
Father McKenna Center Donation Page: Donate - Father McKenna Center
Stacking Benjamins YouTube Live Stream Roundtable: Decumulational Strategies: The Special Retirement Spend Down Strategy Roundtable
Hendrik Bessembinder on Rational Reminder Podcast: Episode 346 - Hendrik Bessembinder: Why It's So Hard to Beat the Market — Rational Reminder
Breathless AI-Bot Summary:
Marching to the beat of your own financial drummer doesn't mean ignoring proven investment principles. In this insight-packed episode, I dive into personalized portfolio construction for retirement success while answering thoughtful questions from listeners who've supported our Father McKenna Center charity campaign.
When constructing retirement portfolios, certain parameters consistently enable higher safe withdrawal rates: 40-70% in equities, 15-30% in treasury bonds, 10-25% in alternatives, and less than 10% in cash. We explore how one listener's portfolio elegantly captures these parameters with a 60/40 split tilted toward value and supplemented with gold, managed futures, and preferred shares.
The eternal question of adding international exposure resurfaces as we examine AVDV (international small-cap value) and IDMO (international momentum). While these funds have performed admirably this year—partly due to dollar weakness—I caution against chasing recent performance without long-term commitment. The property and casualty insurance sector (KBWP) similarly warrants consideration for its diversification benefits, having weathered the 2022 downturn admirably.
Perhaps most fascinating is our deep dive into direct indexing small-cap value stocks. One listener's meticulous experiment—complete with profitability screens, debt filters, and rebalancing protocols—illustrates both the potential and the complexity of this approach. I contrast this with Hendrik Bessembinder's research showing that roughly 4% of stocks drive the vast majority of market returns, underscoring why picking individual small-caps presents particular challenges.
For those approaching or in retirement, I offer a counterintuitive perspective on lump-sum cash inflows: sometimes the most efficient approach isn't investing at all, but rather using those funds to cover expenses for several years, potentially reducing tax liability without significantly impacting long-term portfolio growth.
Whether you're crafting your retirement strategy, exploring direct indexing, or optimizing your withdrawal approach, this episode delivers practical insights for aligning your investments with your unique financial journey.
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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, a different drummer.
Mostly Mary (00:19):
And now, coming to you from dead center on your
dial, welcome to Risk ParityRadio, where we explore
alternatives and assetallocations for the
do-it-yourself investorBroadcasting to you now from the
comfort of his easy chair.
Here is your host, frankVasquez.
Mostly Uncle Frank (00:37):
Thank you, Mary, and welcome to Risk Parity
Radio.
If you are new here and wonderwhat we are talking about, you
may wish to go back and listento some of the foundational
episodes for this program.
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.
Mostly Mary (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 (01:38):
But now onward, episode 429.
Today, on Risk Parody Radio, wewill be attending to your
emails, but before we get tothat, I just wanted to let you
know that I did an interestingroundtable for Stacking
Benjamins yesterday, which isstreamed on YouTube and it's
there already, although it willbe processed into a proper
(01:58):
podcast in the near future, butit featured me and Karsten yeska
welcome to another edition ofthunderdome and dana anspach,
along with joe selsey.
Hi, joe asked karsten and I tobehave, and we mostly did oh how
(02:20):
very clever.
Voices (02:21):
But I don't know why you'd say something like that,
knowing that I might come afteryou with butchering tools.
Mostly Uncle Frank (02:28):
He was lucky that Dana was there.
He probably invited her just tomake sure there was something
salvageable out of the episode.
This is pretty much the worstvideo ever made, and she didn't
seem too appalled at ourbehavior.
I have a feeling we're not inKansas anymore, but the most
important thing we learned fromit was that Carson's favorite
(02:48):
soundbite from this program isthis one I award you no points
and may.
God have mercy on your soul.
Anyway, I will link to it inthe show notes on YouTube and
you can check it out at yourleisure.
Mostly Mary (03:03):
Don't be saucy with me, Bernays.
Mostly Uncle Frank (03:06):
But now let's get to the main event.
Voices (03:08):
Here I go once again with the email.
Mostly Uncle Frank (03:11):
And First off.
First off, we have an emailfrom Brent.
Voices (03:17):
Astronaut Brent Trapped by the swaggering, brutal master
race of apes who dominate theEarth.
Mostly Mary (03:24):
And Brent writes Hi Frank, brutal master race of
apes who dominate the earth.
And Brent writes Hi Frank, Isent a $250 donation via
Fidelity Charitable to theFather McKenna Center for the
Matthew 6-3 matching gift yeah,baby yeah.
I'm grateful for all theknowledge and ideas I've learned
from your podcast over the lastfour years.
Thank you for building thisawesome resource and community.
(03:44):
All the best, Brent.
Voices (03:47):
My God, did we finally do it Did?
Mostly Uncle Frank (03:54):
we finally really do it.
Well, Brent, thank you so muchfor your contribution to our
matching campaign for the FatherMcKenna Center.
Mostly Mary (04:04):
It's top drawer, really top drawer.
Mostly Uncle Frank (04:08):
As most of you know and we've been talking
about one of our listeners,matthew 63, put up $15,000 to
donate to the Father McKennaCenter as matching funds.
Voices (04:18):
That's the fact, Jack.
That's the fact, Jack.
Mostly Uncle Frank (04:23):
Now the Father McKenna Center is our
charity that we support here.
It supports hungry and homelesspeople in Washington DC.
And full disclosure I am in theboard and am the current
treasurer, but every dollar yougive these days will be doubled.
Voices (04:36):
Double your pleasure, double your fun.
Mostly Uncle Frank (04:40):
And then we will get our logo put on the top
of the T-shirt.
When it comes time for theannual Walk for McKenna, which
occurs in September, I am amazedand grateful for the support
we've already received.
All of the emailers today aredonators.
Voices (04:55):
The best, Jerry the best .
Mostly Uncle Frank (04:57):
Because, as the other bonus you get for
donating to the Father McKennaCenter, you get to go to the
front of the email line.
Voices (05:03):
Oh, how convenient the Father McKenna Center.
Mostly Uncle Frank (05:04):
You get to go to the front of the email
line, ooh how convenient, and so, if you want me to tend to your
email earlier rather than later, I suggest you become a donor.
Never been a better time thanright now.
Thank you for your support andthank you for your email.
Voices (05:20):
Show me the money, jerry , you better yell.
Mostly Uncle Frank (05:24):
Show me the money, jerry, you better yell,
show me the money Second off.
Voices (05:31):
Second off, we have an email from Peter.
Hello Peter, what's?
Mostly Mary (05:34):
happening.
And Peter writes Hi Frank, Ican't believe it's been two
years since my last one-on-oneconsultation with you.
Voices (05:43):
And it's gone poof.
Mostly Mary (05:47):
I retired shortly after that session and things
are going well.
Voices (05:50):
Snooze and dream, dream and snooze.
The pleasures are unlimited.
Mostly Mary (05:56):
I have come to realize that you and your
podcast have had a larger impacton my financial strategy than
any other resource and with thematching program you have right
now, it's a good time for me toshow my appreciation by donating
to the Father McKenna Center.
I attached the confirmationbelow.
On to the questions First Iwant to get your thoughts on my
(06:19):
asset allocation.
I'm retired now and open torisk, looking to have a solid
portfolio for the long term thatI don't have to tweak too much.
My current target assetallocation is as follows 1.
Large cap 40% VTI.
2.
Small cap 20% VIOV.
3.
Long term bonds 15% VGLT.
(06:42):
4.
Gold 10% GLDM.
Gldm Five managed futures 7.5%DBMF.
Six preferred shares 5% PFFV.
Seven cash 2.5% three-monthtreasury bills.
(07:02):
Anything you would change here.
I've had VTI for a long time,which is why it is my large cap
ETF.
Part of this is FOMO, butwondering if I should consider
adding some of the newer assetclasses being discussed.
I have a very large amount ofcash from some proceeds I
received at the end of last yearand need to invest it.
So asking these questions now 1.
(07:24):
You pro wondering if it isgetting more important to have
some leverage in a portfolio,even if just 5%.
Should I consider moving somelarge cap here or other?
Any other leverage ETFs Ishould consider?
Voices (07:37):
You have a gambling problem 2.
Mostly Mary (07:41):
Avdv and or IDMO.
I keep going back and forth onwhether I should have something
international in my portfolio.
3.
Kbwp Looks interesting.
I know you self-indexed this,but it's not something I'm
interested in.
Should I consider the fund?
Second, I will have some largeamounts of cash coming in from
(08:01):
the liquidation of alternativeinvestments and I'm trying to
decide how to handle it.
Originally I was going to addit to my portfolio and increase
my withdrawal accordingly, butrunning the numbers it seems
like I would get more benefit ifI use it to reduce my expenses
over several years and therebyreduce my tax liability in those
years.
My drawdown in the early yearsbecomes much lower and the plans
(08:24):
ending asset balance doesn'tchange by much.
Obviously, I give up thepotential growth of that money.
Curious if you have a view onhow to handle this scenario.
Mostly Uncle Frank (08:52):
Apologies for the long email and thank you
for your kind words and thankyou for a donation to the Father
McKenna Center.
Voices (09:02):
Winner winner chicken dinner.
Mostly Uncle Frank (09:07):
Two years ago.
Huh, I guess I have been doingthis for a while.
In case anybody's wondering yes, I still do one-on-one
consultations, but I nevermention it unless somebody else
does, because guess what?
Voices (09:22):
I don't think I'd like another job.
Mostly Uncle Frank (09:25):
But if you're interested in that,
you'll have to email me and wecan set that up.
I do charge $300 an hour for atwo-hour minimum of financial
coaching.
Is what it is, and I do aboutone a month and that's more than
enough, since I only starteddoing it by popular demand.
Voices (09:45):
He's been in the basement all morning chewing on
coca leaves.
Please give your undividedattention to Senor Matt Foley,
Hola niños.
Me llamo Matt Foley Y yo soy unmotivational speaker.
Yo tengo tres ente y cinco años, I have 35 years, I am divorced
(10:15):
and I live and die around theworld.
Mostly Uncle Frank (10:26):
Your portfolio looks good to me.
It has all of the parameters ofa portfolio that generally has
a higher safe withdrawal rate.
And just to review what thosekind of rules of thumb or
parameters are is to have aportfolio that is 40 to 70% in
equities you have 60% inequities.
Have a portfolio that isbetween 15% and 30% in treasury
(10:50):
bonds you have 15% in VGLT.
The preferred shares also actlike a kind of bond, so I would
include that as a extra bondallocation that pays a little
bit more.
Then the next rule of thumb isto have between 10 and 25
percent in alternatives, and youhave 17.5 percent in
(11:11):
alternatives.
And then the final rule ofthumb is to have less than 10
percent in cash and you have 2.5percent in cash.
So all of those things will getyou a higher safe withdrawal
rate generally than some kind ofstandard stock and bond
portfolio.
And I usually say well, I alwayssay generally.
You want to have your stockportion of the portfolio split
(11:33):
between growth and value andit's slightly tilted more
towards growth and value, butit's not significantly, because
VTI is a large cap blend fund.
Most of the time it tiltstowards growth when things are
growing well and I certainlywouldn't be running out selling
out of that if it's going tocause you tax problems in
(11:53):
particular.
So I don't see any reason tochange anything.
In particular if you'recomfortable with this, because
I'm really not that dogmatic onexactly what people hold that's
not in keeping with what we'retrying to do here, which is to
apply three principles the HolyGrail principle, the macro
allocation principle and thesimplicity principle, which you
have done, and that's why we sayour sample portfolios are just
(12:16):
sample portfolios.
They are not magic formulas ordogmatic edicts for somebody to
follow.
Now, as to your other optionsor questions, first of all, you
pro, I don't think you'dprobably want to have that in
your portfolio.
Voices (12:34):
You have a gambling problem.
Mostly Uncle Frank (12:36):
Just because , unless you've held leverage
things before, they move arounda lot and that is generally not
very pleasant watching things ina retirement portfolio
potentially go down by largepercentages in a day or a week,
even if they can do the samething on the upside.
So if you were going to doanything with that, I would just
(13:00):
hold a very tiny amount of itand see if you really want to
handle something like that.
I would not really make it anallocation, if you will, to the
portfolio in any meaningfulsense.
Now, avdv and or IDMO and thoseare an international small cap
value fund and an internationallarge cap momentum fund.
(13:24):
That's really a large capgrowth fund.
Those look exciting.
This year I think ADVD is up 10%or something like that and IDMO
is up over 20%, which isunusual.
But a lot of that has to dowith the fall in the US dollar.
A very large portion of theoutperformance of international
stocks this year has to do withthe weakening of the US dollar
(13:45):
against other currencies and not, in particular, anything going
on in these countries.
Oh, there is something going onin a lot of these countries
that's more positive than the USright now in terms of growth
potentials.
So I don't think younecessarily need these things,
but they wouldn't be wrong tohold.
If you really wanted to add thatextra complexity, I would not
(14:08):
be running off throwing bigchunks into them right away.
I would probably dollar costaverage into one or the other
one and probably out of your VTIallocation.
But if you're going to do that,you really need to commit to
holding these things for thelong term.
I'm talking about the next 10years because if the dollar
re-strengthens again, you couldwatch these go down versus your
(14:30):
US stocks and it would look likethe last 10 or 15 years when
international underperformed andI can't predict the future on
that.
Mostly Mary (14:40):
A crystal ball can help you, it can guide you.
Mostly Uncle Frank (14:45):
So I don't think you need them, but if you
want them, I would sell some ofyour VTI dollar cost average
into these things, but plan tohold them for the long term.
All right then.
Moving to KBWP, this is theproperty and casualty insurance
companies.
The fee is kind of high it's0.35.
It used to be 0.45.
(15:06):
But these are very useful.
As we've talked about, I ownthese companies in a direct
indexed format.
These are companies like Chubband Progressive and Travelers
and Allstate.
What's nice about them, atleast the time I've held them in
the past 10 years, is that theydo perform just as well as the
(15:26):
rest of the stock market.
I wouldn't expect them toperform any better, even though
recently they have, but theyalso exhibit a lot of positive
diversification qualities tothem, including being up in 2022
when most things were down.
They are a mid-cap value fundis where you would place them in
terms of growth and value.
But the thing is, I mean, thisfund has not been around that
(15:48):
long.
I think it's been around since2010.
And so I don't have anylong-term analysis showing that
a fund like this is a goodholding to have, say, over the
past 50 or 70 years or somethinglike that.
I have to believe it probably issimply because people like
Warren Buffett load up on thingslike this and it's the baseline
(16:09):
for their investmentphilosophies, which is why I
looked at these things in thefirst place.
And, in Warren Buffett terms,they do have gigantic moats
around what they do, sincethey're in a highly regulated
environment.
They're very large, they'revery stable and they get very
large streams of income from alldirections because they sell
(16:30):
property and casualty insurancepolicies to millions of people.
So again, I come out in thesame place I did with the other
two you asked about.
It would not be wrong to movesome of your VTI money into KBWP
, but if you do do that, youneed to commit to it long term.
What I really worry about whenpeople ask these kind of
questions is whether they reallyhave that commitment in mind or
(16:53):
they're just looking atsomething because it happens to
look good recently.
Voices (16:57):
A-I-D-A.
Attention, interest, decision,action.
Attention, do I have yourattention Interest?
Are you interested?
I know you are.
Decision have you made yourdecision for Christ and action?
Mostly Uncle Frank (17:14):
And that is a real problem that most amateur
investors like to look at whathas done well recently and by
recently I mean between the oneand last 10 years and jump on
those funds.
But the truth is, if somethingperformed better than the market
in the last one to 10 years,there's a good likelihood it'll
perform worse than the rest ofthe market in the next 10 years,
(17:36):
at least if it's just some kindof large index or sector kind
of thing.
And that is my caveat to thesekinds of decisions.
I do hold all three of thosefunds in our personal portfolios
, but I've held them all forquite a while, except for I may
have only acquired IDMO in thepast couple of years because I
(17:57):
only found it recently, but Ihad some other large cap
international fund that Iexchanged for it.
Now moving to your secondquestion, the large amount of
cash coming.
Voices (18:08):
It's time for the grand unveiling of money.
Mostly Uncle Frank (18:12):
Yeah, this is an interesting situation.
I think you're probably correctin not investing it and simply
spending it, and I wouldprobably say that with anything
that is less than one to threeyears of cash as far as your
expenses are concerned, becauseyou're correct that by investing
it and then turning around andtaking the money out, there's
(18:33):
going to be tax liabilities thatgo on there and just in terms
of the management of it, it'sgoing to be a lot simpler if you
just spend it and you'llprobably have the same kind of
result you would as if you wouldhave invested it in that short
of a time frame.
I can tell you I still getdribs and drabs of money from
legal work and other things thatI do, and we just spend
(18:55):
whatever it is and use it toreduce expenses at the time, and
I probably would do that withanything that's less than like
two or three years worth ofexpenses.
So I think the simplicityprinciple really says hold the
cash and spend it rather thanputting it back into something
that just will make your lifemore complicated and probably
not add much of anything to yourinvestments.
(19:16):
Overall, I'm not a smart man, inaddition to potentially
creating tax issues if you wereto invest it and you wanted some
of these other funds yes, thatyou would probably buy some of
these things you wereconsidering, because that's also
a possibility for new money interms of an allocation Assuming
you're not over allocated tostocks right now you probably
(19:39):
are not.
So I think you're in good shapeand you have a lot of good
options here, and it was verynice to hear from you.
Again, thank you for yourcontributions to this podcast
and thank you for your email.
Voices (20:03):
Last off.
Last off is an email from Psyoff in an email from Cy.
Mostly Uncle Frank (20:17):
And Cy writes.
Mostly Mary (20:19):
Hi Cousins, frank and Mary, thanks for the
opportunity to contribute to thework at the Father McKenna
Center.
Okay, here's my question.
If I were using direct indexingas a portion of my golden
butterfly portfolio, how would Ihandle a rebalancing event If
the direct index had fallenbelow its band?
Would I buy the down companies,rebalance the entire direct
(20:42):
index, buy an equal allocationof each company?
With all the recent discussionsaround direct indexing, I
thought this would be a goodtime to let you know about the
unspeakable experiment I've beenrunning with small cap value
stocks In the golden butterflyportion of our portfolio.
We use IJS for the small capvalue portion.
(21:03):
I was curious to see if a moreconcentrated basket would do
better, given that about half ofthe RUT isn't even profitable.
I didn't find similar dataabout the S&P 600 small cap
value index, but I went withthat same idea.
Here's how I set it up Smallcap direct index screen Screen
(21:24):
4,.
Roic is greater than or equal to15%.
Net debt earnings are less thanor equal to 2.
The market cap is between $200million and $2 billion.
The closing price is between$10 and $500.
The PE is less than or equal to50.
(21:44):
Exclude companies and countrieswithout rule of law.
Adjust market cap rate toinclude 29 to 33 companies.
Initial process 14,500 investedin 29 companies, plus money
market fund to hold dividendsequal weight by market cap.
Two accounts Fidelity, roth andFidelity Joint WROS On February
(22:09):
7, 2025, reallocate cashquarterly 221, 524, 821, 1121.
Reallocate equal amount to eachcompany.
Rebalance annually 334 daysafter purchase.
Sell losing companies tocapture short-term capital
losses and avoid wash sales 51weeks after purchase run screen
(22:32):
52 weeks plus one day afterpurchase.
Sell companies not in newscreen.
Withdraw 5% from Roth, firstfrom cash, then from best
performers to simulate drawdownphase.
Joint will simulateaccumulation phase.
Calculate new equal weightamount.
Buy new companies phase.
Calculate new equal weightamount.
(22:53):
Buy new companies.
Buy new equal weight amount ofnew stocks.
Sell shares as necessary withlong-term capital gains.
I attached an Excel workbookwith two sheets tracking and
positions.
I have found a new appreciationfor why we pay fees for these
funds.
If I had to vote for 600 panelsof directors, I'd charge more
than 0.8%.
What a pain.
I just ignore the emails.
Mostly Uncle Frank (23:24):
Well, first off, thank you for also being a
donator to the Father McKennaCenter and our Top of the
T-Shirt campaign.
Voices (23:32):
You are a fun person.
I like you.
I want to kiss you always.
Mostly Uncle Frank (23:38):
I always marvel at the complex things
that the listeners to thispodcast often choose to
implement, but I know we have alot of curious investors out
there and I don't see anythingoutrageous here, although it
does make your life morecomplicated.
Voices (23:54):
Hearts and kidneys are tinker toys.
Mostly Uncle Frank (23:57):
I will say the issues you've raised really
show you why direct indexingdoes add some complexity to
whatever you're doing, becauseyou do have to make all these
kind of decisions and it's notclear in any circumstance which
is quote the right way unquoteto do these things.
Here are my general thoughts onthese things, although this is
more my opinion than anythingI've really researched in detail
(24:22):
, based on just what I know andwhat I actually do with our
direct index stuff, which isthose insurance companies and a
couple other things.
So I first look at the wholepot, if you will, because these
are part of an overallallocation, in your case to
small cap value, and so I wouldbe considering that whole group
(24:46):
of companies as one allocationin terms of deciding whether it
needed to be rebalanced or not.
I typically do not rebalanceinside the direct index portion
because it's more complicatedand I'm not sure that it really
helps.
There's an interestingdifference between holding a
(25:07):
fund and an individual companythat individual companies are
more likely to just keep doingwell if they are already doing
well, whereas because funds arealways changing their mix based
on their algorithm, it's not thesame when you're looking at a
fund versus looking at a company.
The other way of saying this islet your winners run, which is
(25:31):
often a good tack to take here.
So, for instance, in our groupof insurance companies,
progressive has been the bestperformer for the past several
years.
I do not sell Progressive tobuy one of the other companies
in that group of direct indexedinsurance companies.
I would only sell parts of thegrouping to rebalance against
(25:53):
the whole rest of the portfolio.
And then, when doing that,there is then a consideration of
tax loss harvesting, dependingon where the assets lie, because
you can always sell a loserwith a winner to get that tax
loss harvesting and then buysomething else that's similar
(26:13):
and is also in the index.
And that's really what I'mlooking at when it comes to the
rebalancing operation, because Icare more about the overall
allocation than I do about anyparticular company in the direct
index sleeve, and I just wantto minimize the number of
transactions direct index sleeveand I just want to minimize the
number of transactions.
So what you've come up with isa far more complicated plan than
(26:37):
I would want to engage with interms of reallocating within the
sleeve.
Voices (26:40):
I'm going to end up eating a steady diet of
government cheese and living ina van down by the river.
Mostly Uncle Frank (26:49):
But I cannot say that what I'm doing is
preferable or better to whatyou're doing.
My way is just simpler.
The other thing that I wouldnote, though, is you noted the
pain that it causes dealing withall of these companies.
I probably would not try toindex small cap value or any
(27:13):
small cap funds, because of theodd way that a small cap fund is
constructed.
Once a company gets too largeas in it's too successful, it
gets dropped from the fund, andso it is really a buying the
worst things all the time andselling the best things all the
(27:34):
time is the way that algorithmworks.
Now that probably works wellfor 600 companies or so, because
it's almost impossible to tellwhich ones are going to perform
better, particularly whenthey're small cap companies.
You can appreciate thedifference if you think about
what a large cap fund does,which is act as a momentum fund,
(27:56):
that it just keeps buying moreand more of the company as it
gets bigger and bigger and keepsgrowing, and it never graduates
or gets dropped because it getstoo big.
So for that reason, I thinkthat direct indexing with larger
companies and just holding themis more like what you would be
(28:16):
doing if you were buying a fund.
It's more similar to that thantrying to direct index a small
cap fund, where you are tryingto recreate an algorithm of some
kind or invent one of your own.
And the other reason I'd be lesssanguine about trying to direct
index small cap funds is thework of Hendrik Bessembinder,
(28:37):
and this is an academic.
I think he's from Arizona orArizona State, but he's been
interviewed several times on theRational Reminder podcast in
particular.
I'll see if I can find one ofhis interviews.
He's done very interestingresearch that shows that a very
small portion of the entireindex say something like 4% is
(28:57):
responsible for the greatproportion of actual returns of
the entire index, and that'strue of the S&P 500, but it's
generally true of any kind ofindex you can think of.
What that tells you is thatstock picking is really hard.
And I think it's even harderwhen the companies are small and
(29:19):
there's more variance to it,because at least with something
that is larger, you know that ithas been successful in the past
.
It has a reason for success.
With the smaller ones, you don'tknow why they're there, whether
they just had recent successbecause their area of business
has been growing, or there'ssomething that they're doing.
You just don't know.
So I think it's even harder topick stocks that are small and
(29:43):
is more the reason just to gowith funds and not try to index
them.
If you want to go see somethinginteresting, go ask a AI bot, a
chat GPT or something, howthese individual small cap value
funds are constructed and whatindex they're following, because
they're different.
They're more different thanyou'll see with large cap funds,
(30:04):
which is why you get morevaried performances between the
Russell version and the S&Pversion and the CRSP version and
then the DFA or Avantisversions.
But I think that's also veryinformative because some of the
indexes already employ aprofitability factor on top of
just the small and value factors, and those funds tend to be
(30:27):
generally more successful.
So I would be very curious tosee how your experiment turns
out.
I do not have any basis forsaying that it's going to be
better or worse than just a fundor some other algorithm that
you might use.
Mostly Mary (30:42):
I would place it over a candle and it's through
the candle that you will see theimages, into the crystal candle
, that you will see the imagesinto the crystal.
Voices (30:57):
But it's interesting stuff to think about if you're
curious and don't mind thecomplexity of it.
Mostly Uncle Frank (31:01):
Hopefully that helps.
Thanks once again for yourdonations and thank you for your
email, but now I see our signalis beginning to fade.
If you have comments orquestions for me, please send
them to frank atriskparityradarcom.
That email is frank atriskparityradarcom.
Or you can go to the website,wwwriskparityradarcom.
(31:21):
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.
Follow a review.
That would be great.
Thank you once again for tuningin.
This is Frank Vasquez with RiskParty Radio.
Voices (32:12):
Signing off death.
Well, I don't know how manymiles wake up the turn Of all
the Nobel Prizes that I've neverwon, and I may be the mayor of
simpleton, but I know one thingthat's I love when the logic
runs cold and all thinking getsdone.
You'll be warming the arms ofthe mayor of simpleton.
Thank you, please beoutstanding for the rare, simple
(32:36):
, simple.
Mostly Mary (32:57):
Please be outstanding for the rare, simple
, simple.
The Risk Parody Radio Show ishosted 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
(33:19):
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, a different drummer.
Mostly Mary (00:19):
And now, coming to you from dead center on your
dial, welcome to Risk ParityRadio, where we explore
alternatives and assetallocations for the
do-it-yourself investorBroadcasting to you now from the
comfort of his easy chair.
Here is your host, frankVasquez.
Mostly Uncle Frank (00:37):
Thank you, Mary, and welcome to Risk Parity
Radio.
If you are new here and wonderwhat we are talking about, you
may wish to go back and listento some of the foundational
episodes for this program.
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.
Mostly Mary (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 (01:38):
But now onward, episode 429.
Today, on Risk Parody Radio, wewill be attending to your
emails, but before we get tothat, I just wanted to let you
know that I did an interestingroundtable for Stacking
Benjamins yesterday, which isstreamed on YouTube and it's
there already, although it willbe processed into a proper
(01:58):
podcast in the near future, butit featured me and Karsten yeska
welcome to another edition ofthunderdome and dana anspach,
along with joe selsey.
Hi, joe asked karsten and I tobehave, and we mostly did oh how
(02:20):
very clever.
Voices (02:21):
But I don't know why you'd say something like that,
knowing that I might come afteryou with butchering tools.
Mostly Uncle Frank (02:28):
He was lucky that Dana was there.
He probably invited her just tomake sure there was something
salvageable out of the episode.
This is pretty much the worstvideo ever made, and she didn't
seem too appalled at ourbehavior.
I have a feeling we're not inKansas anymore, but the most
important thing we learned fromit was that Carson's favorite
(02:48):
soundbite from this program isthis one I award you no points
and may.
God have mercy on your soul.
Anyway, I will link to it inthe show notes on YouTube and
you can check it out at yourleisure.
Mostly Mary (03:03):
Don't be saucy with me, Bernays.
Mostly Uncle Frank (03:06):
But now let's get to the main event.
Voices (03:08):
Here I go once again with the email.
Mostly Uncle Frank (03:11):
And First off.
First off, we have an emailfrom Brent.
Voices (03:17):
Astronaut Brent Trapped by the swaggering, brutal master
race of apes who dominate theEarth.
Mostly Mary (03:24):
And Brent writes Hi Frank, brutal master race of
apes who dominate the earth.
And Brent writes Hi Frank, Isent a $250 donation via
Fidelity Charitable to theFather McKenna Center for the
Matthew 6-3 matching gift yeah,baby yeah.
I'm grateful for all theknowledge and ideas I've learned
from your podcast over the lastfour years.
Thank you for building thisawesome resource and community.
(03:44):
All the best, Brent.
Voices (03:47):
My God, did we finally do it Did?
Mostly Uncle Frank (03:54):
we finally really do it.
Well, Brent, thank you so muchfor your contribution to our
matching campaign for the FatherMcKenna Center.
Mostly Mary (04:04):
It's top drawer, really top drawer.
Mostly Uncle Frank (04:08):
As most of you know and we've been talking
about one of our listeners,matthew 63, put up $15,000 to
donate to the Father McKennaCenter as matching funds.
Voices (04:18):
That's the fact, Jack.
That's the fact, Jack.
Mostly Uncle Frank (04:23):
Now the Father McKenna Center is our
charity that we support here.
It supports hungry and homelesspeople in Washington DC.
And full disclosure I am in theboard and am the current
treasurer, but every dollar yougive these days will be doubled.
Voices (04:36):
Double your pleasure, double your fun.
Mostly Uncle Frank (04:40):
And then we will get our logo put on the top
of the T-shirt.
When it comes time for theannual Walk for McKenna, which
occurs in September, I am amazedand grateful for the support
we've already received.
All of the emailers today aredonators.
Voices (04:55):
The best, Jerry the best .
Mostly Uncle Frank (04:57):
Because, as the other bonus you get for
donating to the Father McKennaCenter, you get to go to the
front of the email line.
Voices (05:03):
Oh, how convenient the Father McKenna Center.
Mostly Uncle Frank (05:04):
You get to go to the front of the email
line, ooh how convenient, and so, if you want me to tend to your
email earlier rather than later, I suggest you become a donor.
Never been a better time thanright now.
Thank you for your support andthank you for your email.
Voices (05:20):
Show me the money, jerry , you better yell.
Mostly Uncle Frank (05:24):
Show me the money, jerry, you better yell,
show me the money Second off.
Voices (05:31):
Second off, we have an email from Peter.
Hello Peter, what's?
Mostly Mary (05:34):
happening.
And Peter writes Hi Frank, Ican't believe it's been two
years since my last one-on-oneconsultation with you.
Voices (05:43):
And it's gone poof.
Mostly Mary (05:47):
I retired shortly after that session and things
are going well.
Voices (05:50):
Snooze and dream, dream and snooze.
The pleasures are unlimited.
Mostly Mary (05:56):
I have come to realize that you and your
podcast have had a larger impacton my financial strategy than
any other resource and with thematching program you have right
now, it's a good time for me toshow my appreciation by donating
to the Father McKenna Center.
I attached the confirmationbelow.
On to the questions First Iwant to get your thoughts on my
(06:19):
asset allocation.
I'm retired now and open torisk, looking to have a solid
portfolio for the long term thatI don't have to tweak too much.
My current target assetallocation is as follows 1.
Large cap 40% VTI.
2.
Small cap 20% VIOV.
3.
Long term bonds 15% VGLT.
(06:42):
4.
Gold 10% GLDM.
Gldm Five managed futures 7.5%DBMF.
Six preferred shares 5% PFFV.
Seven cash 2.5% three-monthtreasury bills.
(07:02):
Anything you would change here.
I've had VTI for a long time,which is why it is my large cap
ETF.
Part of this is FOMO, butwondering if I should consider
adding some of the newer assetclasses being discussed.
I have a very large amount ofcash from some proceeds I
received at the end of last yearand need to invest it.
So asking these questions now 1.
(07:24):
You pro wondering if it isgetting more important to have
some leverage in a portfolio,even if just 5%.
Should I consider moving somelarge cap here or other?
Any other leverage ETFs Ishould consider?
Voices (07:37):
You have a gambling problem 2.
Mostly Mary (07:41):
Avdv and or IDMO.
I keep going back and forth onwhether I should have something
international in my portfolio.
3.
Kbwp Looks interesting.
I know you self-indexed this,but it's not something I'm
interested in.
Should I consider the fund?
Second, I will have some largeamounts of cash coming in from
(08:01):
the liquidation of alternativeinvestments and I'm trying to
decide how to handle it.
Originally I was going to addit to my portfolio and increase
my withdrawal accordingly, butrunning the numbers it seems
like I would get more benefit ifI use it to reduce my expenses
over several years and therebyreduce my tax liability in those
years.
My drawdown in the early yearsbecomes much lower and the plans
(08:24):
ending asset balance doesn'tchange by much.
Obviously, I give up thepotential growth of that money.
Curious if you have a view onhow to handle this scenario.
Mostly Uncle Frank (08:52):
Apologies for the long email and thank you
for your kind words and thankyou for a donation to the Father
McKenna Center.
Voices (09:02):
Winner winner chicken dinner.
Mostly Uncle Frank (09:07):
Two years ago.
Huh, I guess I have been doingthis for a while.
In case anybody's wondering yes, I still do one-on-one
consultations, but I nevermention it unless somebody else
does, because guess what?
Voices (09:22):
I don't think I'd like another job.
Mostly Uncle Frank (09:25):
But if you're interested in that,
you'll have to email me and wecan set that up.
I do charge $300 an hour for atwo-hour minimum of financial
coaching.
Is what it is, and I do aboutone a month and that's more than
enough, since I only starteddoing it by popular demand.
Voices (09:45):
He's been in the basement all morning chewing on
coca leaves.
Please give your undividedattention to Senor Matt Foley,
Hola niños.
Me llamo Matt Foley Y yo soy unmotivational speaker.
Yo tengo tres ente y cinco años, I have 35 years, I am divorced
(10:15):
and I live and die around theworld.
Mostly Uncle Frank (10:26):
Your portfolio looks good to me.
It has all of the parameters ofa portfolio that generally has
a higher safe withdrawal rate.
And just to review what thosekind of rules of thumb or
parameters are is to have aportfolio that is 40 to 70% in
equities you have 60% inequities.
Have a portfolio that isbetween 15% and 30% in treasury
(10:50):
bonds you have 15% in VGLT.
The preferred shares also actlike a kind of bond, so I would
include that as a extra bondallocation that pays a little
bit more.
Then the next rule of thumb isto have between 10 and 25
percent in alternatives, and youhave 17.5 percent in
(11:11):
alternatives.
And then the final rule ofthumb is to have less than 10
percent in cash and you have 2.5percent in cash.
So all of those things will getyou a higher safe withdrawal
rate generally than some kind ofstandard stock and bond
portfolio.
And I usually say well, I alwayssay generally.
You want to have your stockportion of the portfolio split
(11:33):
between growth and value andit's slightly tilted more
towards growth and value, butit's not significantly, because
VTI is a large cap blend fund.
Most of the time it tiltstowards growth when things are
growing well and I certainlywouldn't be running out selling
out of that if it's going tocause you tax problems in
(11:53):
particular.
So I don't see any reason tochange anything.
In particular if you'recomfortable with this, because
I'm really not that dogmatic onexactly what people hold that's
not in keeping with what we'retrying to do here, which is to
apply three principles the HolyGrail principle, the macro
allocation principle and thesimplicity principle, which you
have done, and that's why we sayour sample portfolios are just
(12:16):
sample portfolios.
They are not magic formulas ordogmatic edicts for somebody to
follow.
Now, as to your other optionsor questions, first of all, you
pro, I don't think you'dprobably want to have that in
your portfolio.
Voices (12:34):
You have a gambling problem.
Mostly Uncle Frank (12:36):
Just because , unless you've held leverage
things before, they move arounda lot and that is generally not
very pleasant watching things ina retirement portfolio
potentially go down by largepercentages in a day or a week,
even if they can do the samething on the upside.
So if you were going to doanything with that, I would just
(13:00):
hold a very tiny amount of itand see if you really want to
handle something like that.
I would not really make it anallocation, if you will, to the
portfolio in any meaningfulsense.
Now, avdv and or IDMO and thoseare an international small cap
value fund and an internationallarge cap momentum fund.
(13:24):
That's really a large capgrowth fund.
Those look exciting.
This year I think ADVD is up 10%or something like that and IDMO
is up over 20%, which isunusual.
But a lot of that has to dowith the fall in the US dollar.
A very large portion of theoutperformance of international
stocks this year has to do withthe weakening of the US dollar
(13:45):
against other currencies and not, in particular, anything going
on in these countries.
Oh, there is something going onin a lot of these countries
that's more positive than the USright now in terms of growth
potentials.
So I don't think younecessarily need these things,
but they wouldn't be wrong tohold.
If you really wanted to add thatextra complexity, I would not
(14:08):
be running off throwing bigchunks into them right away.
I would probably dollar costaverage into one or the other
one and probably out of your VTIallocation.
But if you're going to do that,you really need to commit to
holding these things for thelong term.
I'm talking about the next 10years because if the dollar
re-strengthens again, you couldwatch these go down versus your
(14:30):
US stocks and it would look likethe last 10 or 15 years when
international underperformed andI can't predict the future on
that.
Mostly Mary (14:40):
A crystal ball can help you, it can guide you.
Mostly Uncle Frank (14:45):
So I don't think you need them, but if you
want them, I would sell some ofyour VTI dollar cost average
into these things, but plan tohold them for the long term.
All right then.
Moving to KBWP, this is theproperty and casualty insurance
companies.
The fee is kind of high it's0.35.
It used to be 0.45.
(15:06):
But these are very useful.
As we've talked about, I ownthese companies in a direct
indexed format.
These are companies like Chubband Progressive and Travelers
and Allstate.
What's nice about them, atleast the time I've held them in
the past 10 years, is that theydo perform just as well as the
(15:26):
rest of the stock market.
I wouldn't expect them toperform any better, even though
recently they have, but theyalso exhibit a lot of positive
diversification qualities tothem, including being up in 2022
when most things were down.
They are a mid-cap value fundis where you would place them in
terms of growth and value.
But the thing is, I mean, thisfund has not been around that
(15:48):
long.
I think it's been around since2010.
And so I don't have anylong-term analysis showing that
a fund like this is a goodholding to have, say, over the
past 50 or 70 years or somethinglike that.
I have to believe it probably issimply because people like
Warren Buffett load up on thingslike this and it's the baseline
(16:09):
for their investmentphilosophies, which is why I
looked at these things in thefirst place.
And, in Warren Buffett terms,they do have gigantic moats
around what they do, sincethey're in a highly regulated
environment.
They're very large, they'revery stable and they get very
large streams of income from alldirections because they sell
(16:30):
property and casualty insurancepolicies to millions of people.
So again, I come out in thesame place I did with the other
two you asked about.
It would not be wrong to movesome of your VTI money into KBWP
, but if you do do that, youneed to commit to it long term.
What I really worry about whenpeople ask these kind of
questions is whether they reallyhave that commitment in mind or
(16:53):
they're just looking atsomething because it happens to
look good recently.
Voices (16:57):
A-I-D-A.
Attention, interest, decision,action.
Attention, do I have yourattention Interest?
Are you interested?
I know you are.
Decision have you made yourdecision for Christ and action?
Mostly Uncle Frank (17:14):
And that is a real problem that most amateur
investors like to look at whathas done well recently and by
recently I mean between the oneand last 10 years and jump on
those funds.
But the truth is, if somethingperformed better than the market
in the last one to 10 years,there's a good likelihood it'll
perform worse than the rest ofthe market in the next 10 years,
(17:36):
at least if it's just some kindof large index or sector kind
of thing.
And that is my caveat to thesekinds of decisions.
I do hold all three of thosefunds in our personal portfolios
, but I've held them all forquite a while, except for I may
have only acquired IDMO in thepast couple of years because I
(17:57):
only found it recently, but Ihad some other large cap
international fund that Iexchanged for it.
Now moving to your secondquestion, the large amount of
cash coming.
Voices (18:08):
It's time for the grand unveiling of money.
Mostly Uncle Frank (18:12):
Yeah, this is an interesting situation.
I think you're probably correctin not investing it and simply
spending it, and I wouldprobably say that with anything
that is less than one to threeyears of cash as far as your
expenses are concerned, becauseyou're correct that by investing
it and then turning around andtaking the money out, there's
(18:33):
going to be tax liabilities thatgo on there and just in terms
of the management of it, it'sgoing to be a lot simpler if you
just spend it and you'llprobably have the same kind of
result you would as if you wouldhave invested it in that short
of a time frame.
I can tell you I still getdribs and drabs of money from
legal work and other things thatI do, and we just spend
(18:55):
whatever it is and use it toreduce expenses at the time, and
I probably would do that withanything that's less than like
two or three years worth ofexpenses.
So I think the simplicityprinciple really says hold the
cash and spend it rather thanputting it back into something
that just will make your lifemore complicated and probably
not add much of anything to yourinvestments.
(19:16):
Overall, I'm not a smart man, inaddition to potentially
creating tax issues if you wereto invest it and you wanted some
of these other funds yes, thatyou would probably buy some of
these things you wereconsidering, because that's also
a possibility for new money interms of an allocation Assuming
you're not over allocated tostocks right now you probably
(19:39):
are not.
So I think you're in good shapeand you have a lot of good
options here, and it was verynice to hear from you.
Again, thank you for yourcontributions to this podcast
and thank you for your email.
Voices (20:03):
Last off.
Last off is an email from Psyoff in an email from Cy.
Mostly Uncle Frank (20:17):
And Cy writes.
Mostly Mary (20:19):
Hi Cousins, frank and Mary, thanks for the
opportunity to contribute to thework at the Father McKenna
Center.
Okay, here's my question.
If I were using direct indexingas a portion of my golden
butterfly portfolio, how would Ihandle a rebalancing event If
the direct index had fallenbelow its band?
Would I buy the down companies,rebalance the entire direct
(20:42):
index, buy an equal allocationof each company?
With all the recent discussionsaround direct indexing, I
thought this would be a goodtime to let you know about the
unspeakable experiment I've beenrunning with small cap value
stocks In the golden butterflyportion of our portfolio.
We use IJS for the small capvalue portion.
(21:03):
I was curious to see if a moreconcentrated basket would do
better, given that about half ofthe RUT isn't even profitable.
I didn't find similar dataabout the S&P 600 small cap
value index, but I went withthat same idea.
Here's how I set it up Smallcap direct index screen Screen
(21:24):
4,.
Roic is greater than or equal to15%.
Net debt earnings are less thanor equal to 2.
The market cap is between $200million and $2 billion.
The closing price is between$10 and $500.
The PE is less than or equal to50.
(21:44):
Exclude companies and countrieswithout rule of law.
Adjust market cap rate toinclude 29 to 33 companies.
Initial process 14,500 investedin 29 companies, plus money
market fund to hold dividendsequal weight by market cap.
Two accounts Fidelity, roth andFidelity Joint WROS On February
(22:09):
7, 2025, reallocate cashquarterly 221, 524, 821, 1121.
Reallocate equal amount to eachcompany.
Rebalance annually 334 daysafter purchase.
Sell losing companies tocapture short-term capital
losses and avoid wash sales 51weeks after purchase run screen
(22:32):
52 weeks plus one day afterpurchase.
Sell companies not in newscreen.
Withdraw 5% from Roth, firstfrom cash, then from best
performers to simulate drawdownphase.
Joint will simulateaccumulation phase.
Calculate new equal weightamount.
Buy new companies phase.
Calculate new equal weightamount.
(22:53):
Buy new companies.
Buy new equal weight amount ofnew stocks.
Sell shares as necessary withlong-term capital gains.
I attached an Excel workbookwith two sheets tracking and
positions.
I have found a new appreciationfor why we pay fees for these
funds.
If I had to vote for 600 panelsof directors, I'd charge more
than 0.8%.
What a pain.
I just ignore the emails.
Mostly Uncle Frank (23:24):
Well, first off, thank you for also being a
donator to the Father McKennaCenter and our Top of the
T-Shirt campaign.
Voices (23:32):
You are a fun person.
I like you.
I want to kiss you always.
Mostly Uncle Frank (23:38):
I always marvel at the complex things
that the listeners to thispodcast often choose to
implement, but I know we have alot of curious investors out
there and I don't see anythingoutrageous here, although it
does make your life morecomplicated.
Voices (23:54):
Hearts and kidneys are tinker toys.
Mostly Uncle Frank (23:57):
I will say the issues you've raised really
show you why direct indexingdoes add some complexity to
whatever you're doing, becauseyou do have to make all these
kind of decisions and it's notclear in any circumstance which
is quote the right way unquoteto do these things.
Here are my general thoughts onthese things, although this is
more my opinion than anythingI've really researched in detail
(24:22):
, based on just what I know andwhat I actually do with our
direct index stuff, which isthose insurance companies and a
couple other things.
So I first look at the wholepot, if you will, because these
are part of an overallallocation, in your case to
small cap value, and so I wouldbe considering that whole group
(24:46):
of companies as one allocationin terms of deciding whether it
needed to be rebalanced or not.
I typically do not rebalanceinside the direct index portion
because it's more complicatedand I'm not sure that it really
helps.
There's an interestingdifference between holding a
(25:07):
fund and an individual companythat individual companies are
more likely to just keep doingwell if they are already doing
well, whereas because funds arealways changing their mix based
on their algorithm, it's not thesame when you're looking at a
fund versus looking at a company.
The other way of saying this islet your winners run, which is
(25:31):
often a good tack to take here.
So, for instance, in our groupof insurance companies,
progressive has been the bestperformer for the past several
years.
I do not sell Progressive tobuy one of the other companies
in that group of direct indexedinsurance companies.
I would only sell parts of thegrouping to rebalance against
(25:53):
the whole rest of the portfolio.
And then, when doing that,there is then a consideration of
tax loss harvesting, dependingon where the assets lie, because
you can always sell a loserwith a winner to get that tax
loss harvesting and then buysomething else that's similar
(26:13):
and is also in the index.
And that's really what I'mlooking at when it comes to the
rebalancing operation, because Icare more about the overall
allocation than I do about anyparticular company in the direct
index sleeve, and I just wantto minimize the number of
transactions direct index sleeveand I just want to minimize the
number of transactions.
So what you've come up with isa far more complicated plan than
(26:37):
I would want to engage with interms of reallocating within the
sleeve.
Voices (26:40):
I'm going to end up eating a steady diet of
government cheese and living ina van down by the river.
Mostly Uncle Frank (26:49):
But I cannot say that what I'm doing is
preferable or better to whatyou're doing.
My way is just simpler.
The other thing that I wouldnote, though, is you noted the
pain that it causes dealing withall of these companies.
I probably would not try toindex small cap value or any
(27:13):
small cap funds, because of theodd way that a small cap fund is
constructed.
Once a company gets too largeas in it's too successful, it
gets dropped from the fund, andso it is really a buying the
worst things all the time andselling the best things all the
(27:34):
time is the way that algorithmworks.
Now that probably works wellfor 600 companies or so, because
it's almost impossible to tellwhich ones are going to perform
better, particularly whenthey're small cap companies.
You can appreciate thedifference if you think about
what a large cap fund does,which is act as a momentum fund,
(27:56):
that it just keeps buying moreand more of the company as it
gets bigger and bigger and keepsgrowing, and it never graduates
or gets dropped because it getstoo big.
So for that reason, I thinkthat direct indexing with larger
companies and just holding themis more like what you would be
(28:16):
doing if you were buying a fund.
It's more similar to that thantrying to direct index a small
cap fund, where you are tryingto recreate an algorithm of some
kind or invent one of your own.
And the other reason I'd be lesssanguine about trying to direct
index small cap funds is thework of Hendrik Bessembinder,
(28:37):
and this is an academic.
I think he's from Arizona orArizona State, but he's been
interviewed several times on theRational Reminder podcast in
particular.
I'll see if I can find one ofhis interviews.
He's done very interestingresearch that shows that a very
small portion of the entireindex say something like 4% is
(28:57):
responsible for the greatproportion of actual returns of
the entire index, and that'strue of the S&P 500, but it's
generally true of any kind ofindex you can think of.
What that tells you is thatstock picking is really hard.
And I think it's even harderwhen the companies are small and
(29:19):
there's more variance to it,because at least with something
that is larger, you know that ithas been successful in the past
.
It has a reason for success.
With the smaller ones, you don'tknow why they're there, whether
they just had recent successbecause their area of business
has been growing, or there'ssomething that they're doing.
You just don't know.
So I think it's even harder topick stocks that are small and
(29:43):
is more the reason just to gowith funds and not try to index
them.
If you want to go see somethinginteresting, go ask a AI bot, a
chat GPT or something, howthese individual small cap value
funds are constructed and whatindex they're following, because
they're different.
They're more different thanyou'll see with large cap funds,
(30:04):
which is why you get morevaried performances between the
Russell version and the S&Pversion and the CRSP version and
then the DFA or Avantisversions.
But I think that's also veryinformative because some of the
indexes already employ aprofitability factor on top of
just the small and value factors, and those funds tend to be
(30:27):
generally more successful.
So I would be very curious tosee how your experiment turns
out.
I do not have any basis forsaying that it's going to be
better or worse than just a fundor some other algorithm that
you might use.
Mostly Mary (30:42):
I would place it over a candle and it's through
the candle that you will see theimages, into the crystal candle
, that you will see the imagesinto the crystal.
Voices (30:57):
But it's interesting stuff to think about if you're
curious and don't mind thecomplexity of it.
Mostly Uncle Frank (31:01):
Hopefully that helps.
Thanks once again for yourdonations and thank you for your
email, but now I see our signalis beginning to fade.
If you have comments orquestions for me, please send
them to frank atriskparityradarcom.
That email is frank atriskparityradarcom.
Or you can go to the website,wwwriskparityradarcom.
(31:21):
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.
Follow a review.
That would be great.
Thank you once again for tuningin.
This is Frank Vasquez with RiskParty Radio.
Voices (32:12):
Signing off death.
Well, I don't know how manymiles wake up the turn Of all
the Nobel Prizes that I've neverwon, and I may be the mayor of
simpleton, but I know one thingthat's I love when the logic
runs cold and all thinking getsdone.
You'll be warming the arms ofthe mayor of simpleton.
Thank you, please beoutstanding for the rare, simple
(32:36):
, simple.
Mostly Mary (32:57):
Please be outstanding for the rare, simple
, simple.
The Risk Parody Radio Show ishosted 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
(33:19):
actions based on any informationyou have heard here, making
sure to take into account yourown personal circumstances.
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