September 17, 2025 • 40 mins
In this episode we answer questions from Chris, George and "I Have No Name." We discuss a transition situation with bonus portfolio question, the plusses and minuses of Pralana and similar calculators, and an amusing take on the Golden Butterfly portfolio reimagined.
Links:
Father McKenna Center Donation Page: Donate - Father McKenna Center
Rational Reminder Podcast: David C. Brown: The Underperformance of Target Date Funds | Rational Reminder 374
Breathless Unedited AI-Bot Summary:
What happens when you need to transition from a high-equity portfolio to a risk parity approach but face limited investment options in your 401(k)? How reliable are those fancy retirement calculators that promise to predict your financial future? And do those neatly organized "bucket strategies" actually improve portfolio performance, or are they just psychological comfort tools?
Frank Vasquez tackles these pressing questions from listeners who are navigating the complexities of retirement planning and portfolio construction. Beginning with practical advice for a listener four years from financial independence, Frank explores how to handle the transition to a risk parity portfolio despite restrictive 401(k) investment options. Rather than fixating on finding the perfect funds immediately, he suggests focusing on getting the macro-allocations roughly right until more flexibility becomes available through an IRA rollover.
The conversation shifts to a critical examination of retirement calculators like Pralana that rely on parameterized returns rather than historical data. Frank cuts through the marketing hype to reveal why these tools often function more like crystal balls than reliable forecasting instruments. "You're supposed to use base rates," he explains, "not make up things from a crystal ball that says things are going to be worse than they were before, better than they were before." This segment offers a masterclass in distinguishing between good forecasting methodologies and mathematically sophisticated but fundamentally flawed approaches.
Perhaps most illuminating is Frank's analysis of bucket strategies in retirement planning. While organizing investments into conceptual buckets labeled for different time horizons may feel reassuring, these psychological tools don't fundamentally alter portfolio performance. "Looking at personal finance and separating what is finance from what is personal" becomes the key insight, helping listeners distinguish between strategies that actually improve financial outcomes versus those that simply make complicated concepts easier to visualize.
Ready to see beyond the marketing gimmicks and focus on evidence-based approaches to retirement planning? Listen now, then like, subscribe, and leave a review to support the show while Frank takes a brief hiatus until mid-October.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Queen Mary and Voices (00:01):
A foolish consistency is the hobgoblin of
little minds, adored by littlestatesmen and philosophers and
divines.
Uncle Frank and Voices (00:10):
If a man does not keep pace with his
companions, perhaps it isbecause he hears a different
drummer.
Queen Mary and Voices (00:17):
A different drummer and now,
coming to you from dead centeron your dial, welcome to Risk
Parity Radio, where we explorealternatives and asset
allocations for thedo-it-yourself investor,
Broadcasting to you now from thecomfort of his easy chair.
Here is your host, FrankVasquez.
Uncle Frank and Voices (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.
Queen Mary and Voices (00:50):
Yeah, baby, yeah.
Uncle Frank and Voices (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.
Queen Mary and Voices (01:27):
Top drawer, really top drawer.
Uncle Frank and Voices (01:31):
Along with a host named after a hot
dog.
Lighten up, francis.
But now onward, episode 455.
Today, on Restorative Radio,we're just going to do what we
do best here, which is attend toyour emails.
Before we get to that, onelittle announcement we're about
(01:58):
to go on hiatus here for thenext few weeks and this will be
the last episode you'll hear forabout a month.
We'll probably make a new onearound October 11th or 12th,
whatever that weekend is.
We're going on vacation.
(02:27):
I will try to update thewebsite in the meantime, but I
can't make any promises.
Forget about it In any event.
Sometimes when I go on hiatus,people wonder if something bad
happened to us.
And it's gone Poof.
I want to assure you nothingbad is going to happen to us.
Should be pretty good, actually.
Queen Mary and Voices (02:48):
The best, jerry the best.
But now, without further ado,here I go once again with the
email.
Uncle Frank and Voices (02:56):
And First off, first off, an email
from Chris.
Queen Mary and Voices (03:02):
I want to hold him like doing Texas plays
.
Fold them, let them hit me,raise it.
Baby, stay with me, I love it.
Uncle Frank and Voices (03:11):
And Chris writes.
Queen Mary and Voices (03:13):
Uncle Frank and Queen Mary.
I've been a listener since yourearly episodes and truly
appreciate all the informationand knowledge you have
synthesized for all of us.
I have learned so much and amattempting to construct a
(03:39):
retirement portfolio for my wifeand me.
To show my appreciation, I havedonated to the Father McKenna
Center via registering for theWalk for McKenna See the
screenshot below.
I live in Indiana so because ofdistance, I donated a little
extra in the hopes that I couldget one of those awesome
t-shirts size large with theRisk Parity Radio at the top
mailed to me.
(03:59):
Yeah, baby.
Yeah.
My wife and I are currently 40years old and, depending on
market returns, we should befinancially independent and
completely work-optional inapproximately four years.
We are currently 100% inequities and I am struggling to
transition our assets to a riskparity style portfolio because
(04:19):
of limited options in our 401ks.
Limited options in our 401ks.
We have approximately 72% ofour investments in 401ks, 7% in
Roth IRAs and 21% in taxablebrokerage.
We contribute up to the matchin our 401ks, max out our IRAs
and everything else goes to thetaxable brokerage.
The 401ks offer various equityfunds, target date funds and a
(04:43):
bond fund or two.
Do I move some to bonds, eventhough they're not the preferred
treasuries, or do I hold mybreath that we don't experience
a sharp downturn and transfer tothe desired allocation after we
can roll one or both over to anIRA?
I wanted to get your thoughts onthe portfolio I have
constructed.
It meets the guidelines youhave discussed, but I think I
(05:04):
need to hear it from your mouththat it's good, or for you to
offer up some suggestions 25%large cap growth, a mix of S&P
500, total market and VUG.
25% small cap value, viov andAVUV.
20% long-term treasuries, 10%VGLT and 10% GOVZ, to be more
(05:28):
like a 25% allocation.
12.5% gold, gldm, 12.5% managedfutures, dbmf and or KMLM.
5% property and casualty.
1% each TRV, all CB, pgr, brk,b.
I'm still a little fuzzy onGOVZ.
(05:51):
Can you explain how these stripsfunds work?
Do I need more than one managedfutures fund or should I just
choose one and stick with it?
Should I direct index the PNCor just pay the management fee
of KBWP?
I like the idea of directindexing, but what kind of rules
would you put in place todecide if one of the individual
(06:11):
companies should be swapped outfor another in the future?
I've toyed with the idea oftaking 2.5% from the gold and
managed futures.
Any suggestions for that 5%?
If I were to do that, I bounceback and forth between wanting
more growth and smoothing outthe ride with a higher expected
safe withdrawal rate.
I hope this wasn't too long.
I don't want Mary to be bugging.
(06:32):
Thanks again for all you dowith the podcast.
Keep up the great work and theentertaining soundbites, chris.
Uncle Frank and Voices (06:44):
Mary.
Mary, I need your huggin' Well.
First off, thank you for beinga donor to the Father McKenna
Center.
As most of you know, we do nothave any sponsors on this
program.
We do have a charity we support.
It's called the Father McKennaCenter and it serves hungry and
homeless people in Washington DC.
Full disclosure I am on theboard of the charity and am the
(07:06):
current treasurer.
But if you give to the charity,as Chris has done here, you get
to go to the front of the emailline.
Actually, all of our emailerstoday have gone to the front of
the line for that reason.
Yes, there are two ways to dothat.
Either you can do it throughthe Father McKenna website, at
the donation page, or you canbecome a patron on Patreon,
(07:28):
which you do through the supportpage at wwwriskparityradiocom,
and either way, we'll move youto the front of the email line.
Just make sure you reference itin your email.
And for those of you who gaveto the top of the t-irt campaign
and do actually want yourT-shirts, oh, boy is this great.
(07:49):
You can send a request for thatstraight to Ben at the Father
McKinnon Center, if you didn'talready put it in your note in
the box when you made yourdonation.
Or send me an email.
Make sure you include the sizeand your address and I will talk
to Ben and get those sent outas soon as we can.
Or send me an email.
Make sure you include the sizeand your address and I will talk
(08:11):
to Ben and get those sent outas soon as we can.
We have top men working on itright now.
Who Top men?
All right now.
Let's get to your questions.
Now you mentioned you should befinancially independent in about
four years, but I wasn't surehow far you are in terms of
(08:33):
reaching your FI number, as inwhat the percentage is, because
if it's 80% or over, then, yeah,you should probably start
making some transitions here,particularly if you have any
flexibility on the time ofretirement.
And yeah, the easiest thing todo, particularly if you have
large 401ks or IRAs traditionalones is to build out that bond
(08:55):
allocation in that account, evenif it's not the exact treasury
bonds you want.
You can just use a total bondmarket fund or something similar
at this point, because once youmove it off to an IRA, then you
can transition it to the exactbonds you want.
Really, the main purpose of itnow is to take some of that risk
off the table, and anyreasonable bond fund can suit
(09:16):
that purpose for a short periodof time.
Make sure you stay out of thosetarget date funds.
People are actually catching onto how bad these things are.
You know I first talked aboutthis back in episode 333 a while
ago, but the most recentRational Reminder podcast with
Ben Felix came out and they wentover a study by an academic
(09:38):
researcher at the University ofArizona which showed these
things are really bad in termsof long-term accumulation and
they're basically like putting a1% drag on what you're doing
when you compare them to justbasic index fund investing.
Now, I know you don't have thatproblem given what you've said,
but I will link to that podcastin the show notes.
(09:59):
If you have any doubts aboutthe problems with target date
funds and why you should not beusing them, listen to that and
you can get the paper that theyrefer to as well.
But that's not the first paperto come to this same conclusion.
So in de-risking your portfolioin the near term, the most
important thing is to deal withthose macro allocations.
(10:21):
So get that allocation tostocks approximately what you
want it to be, the allocation tobonds approximately what you
want it to be and thealternatives as best you can
deal with it at this point intime, which might mean buying
something now in the taxableaccount and then switching
things up later on or doingsomething in the Roth Now.
Looking at this sample orplanned portfolio you've got
(10:44):
here, I think this fits the bill.
It conforms with all of thethings that make a portfolio
have a higher safe withdrawalrate.
It's got between 40 and 70percent in stocks.
Looks like 55 percent.
The way you have it structurednow Looks like at least half of
that is tilted towards value.
Looks like you've got between15 and 30 percent in long and
(11:05):
intermediate treasury bonds andthen you've got between 10 and
25 percent in alternatives andyou don't have an excessive pile
of cash.
I notice you also have whatBill Bengen thinks is the sweet
spot for a stock equityallocation, which is 55 percent,
which is good.
You need somebody watching yourback at all times.
(11:26):
Make sure you listen to thelast podcast where we talked a
little bit more about those kindof factors and that kind of
research.
All right, looking at your nextquestions, let's deal with the
property and casualty insurancecompany question first.
I would probably just pay theKBWP management fee in this case
, although it kind of depends onwhat the overall allocations
(11:48):
are.
Since your overall allocationto these is going to be so small
, the extra added fee isn'tgoing to be that large in the
grand scheme of things.
Now, it's not wrong to managethem yourself, like I do, but it
will be annoying and I'm notsure you want to go through the
annoyance of it just to save onthat fee on 4% or 5% of your
(12:12):
portfolio.
Because, as you surmise, assoon as you start direct
indexing something like that,you have to come up with other
rules or guidelines to handlewell what happens to this part
of the portfolio.
The way I tend to look at thatpart of our portfolio, which is
somewhere around 8% to 10% thatwe have in property and casualty
insurance companies is first, Ijust consider the whole
(12:34):
allocation to all of the stocksas one big allocation in terms
of comparing that to otherthings.
So in your case I would not belooking at 1% of each one of
those things.
I would consider that 4% or 5%if you're considering Berkshire
as part of that, and so that iswhat you'd be comparing to your
other asset allocations forrebalancing purposes, because
(12:57):
really you want to avoid makingtoo many transactions with those
individual allocations.
Other than that, I would justplan on essentially holding them
forever and selling pieces ofthem whenever it seemed
appropriate or buying more ofsomething, but that would be the
place where you would buy anadditional company or something
like that.
It would be if you ended upbuying into the allocation
(13:20):
because you're rebalancing intoit.
At that point in time I mightconsider buying a different
company that's in the sameallocation.
Other than that, I'd probablyjust kind of let the winners run
, because that seems to workbest for individual stocks, even
though it's counterintuitiveand we're not talking about
gigantic allocations, whichwould be a different kettle of
fish.
You're going to need a biggerboat.
(13:43):
Okay, now you mentioned whethertaking five percent out of the
gold and managed futures wouldmake sense and what you would
put it in.
Well, it could make sense.
You could put it ininternational growth or
international small cap value orsome combination of those if
you wanted more stocks.
You could put it in cash if youwanted to be more conservative
and just take out from that cashallocation or bucket, if you
(14:05):
will.
Or maybe you want to do somekind of rising glide path thing,
like we talked about in episode454 and in Bill Bengen's new
book, whereas you start withthat allocation but then you
reallocate maybe 1% to equitiesfor the next five years or some
period over time.
But I have to tell you, all ofthat is making this a lot more
(14:27):
complicated than it really needsto be, because I'm not sure any
of those things is going tohave a big difference on your
overall performance of thisthing over long periods of time.
Next question do you need morethan one managed futures fund?
The answer is no.
You could have more than one.
Again, if you want to fiddlewith that, you will get slightly
(14:51):
better diversification, but Idon't know if you'd get better
performance ultimately, and thetotal allocation to this asset
class just isn't that great.
So I would probably just useDBMF in most circumstances,
because that is the closestthing we have to an index fund
in this category right now.
We have new funds that havecome out recently, but I can't
tell you that much about them,and DBMF has been around long
(15:11):
enough that we have a reallygood idea of how it's likely to
perform in the future, at leastrelative to other things in the
same class.
And finally, you asked aboutSTRIPS GOVZ in particular.
What are Treasury STRIPS?
Believe it or not, that's anacronym.
It stands for Separate Tradingof Registered Interest and
(15:33):
Principal Securities.
Inconceivable, isn't that amouthful?
But basically what they'redoing is taking apart a bond and
separating the principal partof it from the coupons or the
interest paying part of it, andwhat you're really getting with
respect to the strips is thebond part of it that doesn't
include the interest.
Now you can look this up onchat, gpt or Grok or your
(15:57):
favorite artificial intelligenceto explain to you exactly how
these work, because if I try todo it on this podcast, it'll be
very confusing.
But the upshot of it is you endup, when you put these things in
a fund and you got a wholebunch of them is you end up with
something that acts like along-term bond with longer
(16:17):
duration than standard long-termtreasury bonds, and so
typically, a long-term treasurybond fund like VGLT is going to
have a duration of about 17years or something like that,
whereas a STRIPS fund is goingto have a duration of about 25
years.
The way that plays into yourinvestments is that the longer
(16:39):
duration funds are moresensitive to changes in interest
rates.
So if the change in the overallinterest rates depending on
where you are in the curve goesdown, say 1%, a long-term
treasury bond like VGLT islikely to go up somewhere
between 15 and 20% and a stripsfund is likely to go up
(17:00):
somewhere between 20 and 30%,and the same thing happens on
the other side of it wheninterest rates go up somewhere
between 20 and 30 percent, andthe same thing happens on the
other side of it.
When interest rates go up,these tend to go down in value.
That's why what they do is makegood recession insurance,
because that's what happensduring a recession.
Other than that, like prettymuch all bonds are kind of a
mediocre return driver.
So it was why you don't want tobe having 30 or 40 percent of
(17:22):
these things in your portfolio.
Now they do also pay an annualyield, although technically it's
not actually interest.
It's just a mechanism how thefunds are operated to
essentially simulate that asthey roll these things over and
as they manage them in the fund.
But they do have a relativelypredictable yield that you can
(17:44):
look up on Morningstar, and sothe general way they function in
a portfolio is they behave asif they were a levered version
of a long-term treasury bondfund and the leverage is about
1.5 to 1, if you're looking athow they behave when interest
rates are moving, which is whatyou care about the most.
So, as you surmise, your 10%long-term treasury bond
(18:08):
allocation and your 10% stripsallocation is going to behave a
lot like a 25% allocation tojust the long-term treasury
bonds, and you don't need toknow all those mechanics of how
these things work in practice,although it's probably a good
idea to spend some time with anartificial intelligence just to
educate yourself so you canunderstand how it all works
(18:30):
internally.
Anyway, hopefully that allhelps.
Thank you for being a donor tothe Father McKenna Center and
thank you for your email.
Bow to your sensei.
Bow to your sensei.
Second off, second off.
We have an email from George.
Queen Mary and Voices (18:51):
So, george, what?
Uncle Frank and Voices (18:51):
does Art Vandelay?
Queen Mary and Voices (18:53):
import.
And George writes Hi Frank, Iheard your rant about many
financial planners, such as therocking retirement guy, doing
little more than entering yourinputs into a planning tool and
producing a pretty report basedon Monte Carlo simulations.
That's not an improvement.
I have been using the PerlanaRetirement Calculator for
(19:15):
several years and believe it isthe best high-fidelity tool for
analysis on the market today.
It was designed by an engineerlike us and is very robust.
I don't know if you have lookedat Perlana, but I would be
curious to hear what you thinkabout it.
The reports generated byPerlana are quite useful,
especially for providing adetailed summary for my CEO, my
(19:36):
wife George.
I don't get it.
There's no human fund.
Those donation cards were fake.
I also have access toMoneyGuide Pro, the same one
used by Roger of RockingRetirement, but I found it is
medium fidelity at best, george.
Uncle Frank and Voices (19:53):
Georgie, would you like some jello?
Why'd you put the bananas inthere?
George likes the bananas.
Well, thank you also for beinga donor to the Father McKenna
Center, George.
It is greatly appreciated,George we've got a problem.
Queen Mary and Voices (20:10):
There's a memo here from accounting
telling me there's no such thingas the human fund.
Uncle Frank and Voices (20:19):
Well, there could be, and I know
you've written before and I doappreciate your emails and
questions.
Now getting to your question,pralana, so I don't spend a
whole lot of time analyzingthese calculators because I find
that they almost all have thesame advantages and drawbacks to
(20:39):
them, just in slightlydifferent ways.
I know it's very popular totalk about these a lot, to
compare them a lot.
There are a lot of podcastersand other people now who are
actually making a lot of moneypromoting various calculators.
So if you hear aboutcalculators on a particular
podcast or venue, you shouldprobably look up and see whether
(21:02):
they are getting paid, becausea lot of people are getting paid
.
A lot more people are gettingpaid than you think.
So all of these calculators arevery good at the basic
spreadsheet functions that youwould ordinarily do on Excel
spreadsheets, and that isorganizing your expenses and
inputs for those sorts of thingsand then also analyzing
(21:25):
different cash flows as they maystart or stop over a period of
time, and you can do this onthose kind of calculators and
get nice, pretty charts out ofthem.
Or you can do it at PortfolioVisualizer for free at the
Financial Goals tool, or you cando it on your own spreadsheets
if you're so inclined, because Istarted doing these kind of
(21:46):
projections a long time ago,before most of these things
existed, and I can tell youthey're actually not improving
people's forecasting abilities.
They're probably detracting fromthem overall, because there's a
lack of understanding as towhat's going on under the hood,
whereas if you actually did iton a spreadsheet, you'd have a
better feel for what was reallygoing on.
(22:06):
So what I just described inthese calculators calculating
expenses, dealing with cashflows, those sorts of things
that goes to what we talkedabout last time in the last
episode about good forecastingtechniques and the difference
between risk and uncertainty.
All of what I'm talking aboutfalls into the risk category,
and so the more calculating youdo of it, the better
(22:29):
understanding you're going toget of it.
Particularly when you'retalking about expenses, if
you're not going too far outinto the future and if you have
known cash flows like socialsecurity that are going to
appear at a particular time,that is also a very good use of
these calculators.
Where these calculators tend tofall down is on the uncertainty
(22:50):
part of these projections,which has to do with actually
projecting the returns of aportfolio, and the reason they
fall down there is becausethey're often black boxes using
embedded crystal balls that comefrom various sources.
Queen Mary and Voices (23:08):
As you can see, I've got several here.
Uncle Frank and Voices (23:10):
A really big one here, which is huge.
Queen Mary and Voices (23:15):
This is the one that I tend to use more
often.
I have a calcite ball and Ihave a black obsidian one here.
Uncle Frank and Voices (23:26):
And so they are not actually modeling
historical returns, which wouldbe the base rates and what you
should start with when you'remodeling returns.
The historical long-termreturns are your base rates that
you're supposed to be workingwith.
If you're using other things,you're using crystal balls.
Queen Mary and Voices (23:44):
Now the crystal ball has been used since
ancient times.
It's used for scrying, healingand meditation.
Uncle Frank and Voices (23:53):
And most of these calculators are using
other things, because, insteadof using historical returns,
they're using what are calledparameterized returns, where you
say that a particular assetclass, or sub-asset class you
think, is going to have a returnof a particular amount and it's
going to have a certainstandard deviation.
(24:13):
And there are severalfundamental problems with
modeling something that way.
The first one is unless this islined up with something that
relates to historical returns,it could be wildly inaccurate.
Forget about it.
And if you're using differentcrystal balls for different
assets, then you don't haveconsistency amongst your crystal
(24:36):
balls.
The crystal ball is a standardpiece of equipment for any
modern fortune teller, but wheredo crystal balls come from?
Gazing into the orb is supposedto give the soothsayer a vision
of the future, which will thenbe shared with the client for a
fee.
And then, finally, this istreating all of these assets as
independent variables, which isnot true at all.
(24:59):
All of your performance, ofyour assets are dependent
variables because they aredependent on the environment in
which they exist at theparticular time the economic
environment.
So in a recessionaryenvironment, you do not expect
stocks to do well, you do expectbonds to do well If you model
these things as independentvariables.
(25:19):
You can essentially be modelingone in a recession and one in
an inflationary period at thesame time, and that is a
fundamental problem with usingparameterized returns.
That cannot be corrected.
So Prolana has this sameproblem that other calculators
have that use parameterizedreturns because that's how its
returns are set up.
(25:40):
Now it's interesting.
I didn't spend a lot of timelooking at Prolana websites.
I did talk to a couple ofdifferent artificial
intelligences about the defaultsettings for Prolana.
Chatgpt says it does not havedefault settings but just allows
you to set them up, which isactually the preferable way to
go, because you would want toknow what the source of the data
(26:01):
is you're using for theparameterized returns and make
sure it's consistent over all ofthe asset classes you're
putting into this sort of thing.
And you don't know that ifyou're just using default
returns of thing, and you don'tknow that if you're just using
default returns.
Now Grok says that Perlanaactually does have default
parameterized returns andaccording to Grok I don't know
(26:23):
whether this is completelyaccurate it is using 5% as the
real return for stocks.
So these are all inflationadjusted.
It's using 5% for internationalstocks.
It's using 5% for REITs.
It's using 1% to 2% for bonds,it's using 1% for international
bonds, it's using 1% for tips,it's using 0% to 0.5% for cash
(26:49):
and using 0% to 1% for otherthings like commodities or gold.
I could tell you those aregenerally all bad return
assumptions.
They are essentiallysubtracting 3% from historicals,
2% to 3% from historicals.
They appear to be based onthese valuation metric kind of
(27:11):
forecasts that Vanguard does orMorningstar does sometimes.
Those have been miserablefailures for at least the past
15 years and there is no reasonanyone should be using them
because they are more likely tobe wrong in the future than
simply using base ratehistorical returns.
And since those are not baserates but based on a crystal
(27:34):
ball, based on currentconditions, if you will.
Queen Mary and Voices (27:39):
Now you can also use the ball to connect
to the spirit world.
Uncle Frank and Voices (27:43):
That's just bad forecasting.
That's not how you do goodforecasting.
You're supposed to use baserates, like we talked about last
time, not make up things from acrystal ball that says things
are going to be worse than theywere before, better than they
were before, or blah, blah, blah.
Queen Mary and Voices (27:57):
That's not how it works.
That's not how any of thisworks.
Uncle Frank and Voices (28:02):
So if Perlana is actually using those
as its default settings, that ispretty much worthless and you
shouldn't be using it.
You need to go in and set thosethings for yourself, based on
things that you think areactually reliable and that have
actually been predictive in thepast.
Unfortunately, you're not goingto find any crystal balls that
(28:22):
are more predictive than simplyusing historical base rates.
Queen Mary and Voices (28:26):
That's the fact, Jack.
That's the fact, Jack.
Uncle Frank and Voices (28:31):
But it may be a useful exercise to
compare those kind ofprojections to historical
projections and you can usesomething like Portfolio
Visualizer for that.
Portfolio Visualizer actuallylets you do it both ways.
It lets you do it historicallyand is going to do horribly in,
say, the first 10 years of thiscentury, because it hasn't
(29:00):
really been tested on that kindof basis and is likely to be
modeling things that have neveroccurred and are never likely to
occur.
The way financial advisorstypically try to get around this
is by doing these parameterizedforecasts, using these
calculators and then going backand doing simulations of how
whatever you come up with wouldhave done in, say, 1987 or 2008
(29:25):
or whatever bad period 1973,1974.
And that is kind of used toattempt to solve this problem of
not having done ahistorical-based forecast in the
first place.
So where I come out on this isthat you should not be using
Perlana's default settings, ifthey are in fact what Grok says
they are.
(29:46):
If you're going to put them inyourself, you need to make sure
you've done the actual researchand are comfortable with those
parameterized returns search andare comfortable with those
parameterized returns.
But in any event, you stillshould do independently
historical-based forecasting andor looking at worst-case
scenarios based on historicalevents, Because whatever you get
(30:06):
out of these parameterizedprojections should be not too
far from what the historicalswould suggest.
Otherwise, you know you arejust going off the reservation
as far as good data science isconcerned and you're not
adhering to something that'scalled the bias-variance dilemma
, which says the more preciseyou try to be with, the more
(30:29):
inputs you try to put intosomething, the more likely it's
going to be wildly inaccurateafter you put it through some
kind of forecasting orcompounding calculator.
And that is pretty much exactlywhat you're doing when you're
doing a set of parameterizedreturns.
So those are my thoughts.
Hopefully that was helpful anddidn't get down into too many
weeds.
(30:49):
But you do need to get intoweeds if you're actually going
to talk about good and badforecasting methodologies.
And thank you for being a donorto the father mckenna center
and thank you for your email youcan't go.
Queen Mary and Voices (31:02):
Who's gonna do the feats of strength?
How about george?
Uncle Frank and Voices (31:07):
good thinking, cougar.
Until you pin me, george.
Queen Mary and Voices (31:13):
Festivus is not over oh, please someone
stop this.
Uncle Frank and Voices (31:18):
Let's rumble.
Queen Mary and Voices (31:20):
I think you can take him, Georgie, Come
on be sensible.
Uncle Frank and Voices (31:24):
Stop crying and fight your father.
Ow Ow, I got it.
This is the best Festivus ever.
Last off, Last off.
We have an email from I have noname.
Queen Mary and Voices (31:37):
You got a name, do you?
I have no name.
Well, that right there may bethe reason you've had difficulty
finding gainful employment andI have no name rights.
Queen Mary and he whosegreatness in this endeavor will
echo for a very long time intothe unknowable future.
Ha ha.
(31:58):
For retirees, who think thatrisk parity sounds nice, but
they worry about the lack ofbuckets, I introduced the Golden
Butterfly Bucket of Buckets.
Surely you can't be serious.
I am serious and don't call meShirley.
Start with the retirementbucket and fill it with the
equivalent of 25 years ofexpenses.
Inside of this bucket there arefive more buckets which each
(32:22):
receive the equivalent of fiveyears of expenses and are
invested in low-cost index funds.
One, a large bucket, investedin large-cap blend.
Uncle Frank and Voice (32:34):
Excellent .
Queen Mary and Voices (32:36):
Two a small bucket invested in
small-cap value.
Uncle Frank and Voices (32:40):
I'm telling you, fellas, you're
going to want that cowbell.
Queen Mary and Voices (32:44):
Three a bond bucket invested in
long-term bonds.
That's what I'm talking about.
Four a cash bucket invested inshort-term bonds.
Uncle Frank and Voices (32:54):
Always money in a banana stand.
Queen Mary and Voices (32:57):
And five, a golden bucket invested in
gold.
I love gold.
Each month, remove theequivalent of one month of
expenses from the bucket thathas the highest value at the
time.
Let's do it.
Uncle Frank and Voices (33:13):
Let's do it.
Queen Mary and Voices (33:18):
And there you have it, problem solved.
Uncle Frank and Voices (33:21):
I'm happier than a peg and slop.
Queen Mary and Voices (33:23):
For retirees who love buckets.
You can thank me by donating tothe Father McKenna Center
Sincerely.
I have no name.
I hate this place.
Geographical oddity.
Uncle Frank and Voices (33:34):
Two weeks from everywhere.
Queen Mary and Voices (33:36):
PS For retirees who really just want
one bucket.
Please also consider the Obtraportfolio.
Uncle Frank and Voices (33:42):
One bucket to rule them all and in
the darkness bind them in theland of Mordor where the shadows
lie, One bucket to rule themall.
Eh, this was a very amusingemail.
(34:03):
What is one good?
Some kind of fun house, whyhaving fun?
And thank you also for being adonor to the father mckinnon
center, before I forget.
But I think what this reallyillustrates is the problem I see
with a lot of the labeling andcutesy names and other things
(34:24):
that go on in financial planning, particularly when you're
talking about time-segmentedstrategies which may involve
buckets, ladders, hoses andflowerpots and pie cakes.
And that is looking at personalfinance and separating what is
finance from what is personal.
And in this context, whatpersonal means is?
What is psychology?
(34:46):
What is being put in place tomake it easier for the user to
either comprehend or to be ableto stick with, and putting
things in buckets and labelingthem is psychology.
It is not finance.
Queen Mary and Voices (35:01):
I am a scientist, not a philosopher.
Uncle Frank and Voices (35:04):
Because it does not improve something
like the safe withdrawal rateoverall and, in fact, may
detract from it and or may makeit more difficult for you to
manage the portfolio, becausethe performance of the portfolio
is based on the assetsthemselves and how they are put
together, how they are mixed.
After that.
(35:25):
It's not influenced by whatorder you put them in, or how
many buckets you have, or whatlabels you put on them or what
future expenses you assign themto.
All of those things may beconvenient for various reasons.
Oh how convenient.
But they don't change how theportfolio is going to perform
(35:47):
and how the plan is going towork overall.
And your email makes a greatillustration of that, because
what you've described is afive-bucket strategy with all
the bells and whistles anyonecould want, but when you break
it down, it's the exact same waywe look at and manage the
golden butterfly portfolio onthe website, without any
(36:07):
reference to buckets at all.
Queen Mary and Voices (36:10):
No triple at all.
Uncle Frank and Voices (36:11):
Now, I don't mind that people want to
use psychological tools toeither help manage or help
present a plan to a client, orwhatever, but the problem is
confusing the psychologicallabels and tools with the actual
finance and performance of theassets, and that's what happens
(36:32):
often.
It mostly happens when peoplethink that by having buckets of
cash or things like that solvessequence of returns risk.
It does not solve sequence ofreturns risk, at least any
sequence of returns risk youactually care about, and the one
you care about is about adecade long.
It's not two or three years, orit's not even five years.
(36:52):
The problem with having adecade-long cash or bond ladder,
though, is it's probably goingto be very inefficient.
Queen Mary and Voices (37:00):
I could have told you that.
Uncle Frank and Voices (37:03):
So if you want to be knowledgeable, or
more knowledgeable, about howall this stuff works in terms of
financial planning andportfolio construction, you do
need to sit down and look at aplan and be able to separate out
which are the financial aspectsof this plan and which are
psychological aspects of it,because anything that is
involving arranging thelollipops on the good ship
(37:25):
lollipop and hoping they tastebetter that way is just
psychology.
It's not finance.
Good ship lollipop, it's asweet trip to the candy shop
where fun fun's, and the soonerwe stop confusing those two
(37:47):
things, the better we will be atcomprehension and real planning
, as opposed to exercises andlabeling.
Stupid is what stupid does, sir.
So thank you for that veryamusing email that illustrates
an important point.
Those are the best kind, aren'tthey?
That's gold, jerry gold, andthank you for being a donor to
(38:08):
the Father McKenna Center again,and thank you for your email.
But now I see our signal isbeginning to fade.
If you have comments orquestions for me, please send
them to frankatriskpartyradarcom.
That email isfrankatriskpartyradarcom.
Or you can go to the website,wwwriskpartyradarcom.
That email isfrankatriskpartyradarcom.
Or you can go to the websitewwwriskpartyradarcom.
Put your message into thecontact form and I'll get it
(38:28):
that way.
Then maybe someday in thefuture I'll actually take a look
at them After we're donevacating.
Looks like you've been missinga lot of work lately.
I wouldn't say I've beenmissing it, bob.
In the meantime, if you haven'thad a chance to do it, please
go to your favorite podcastprovider and like subscribe.
(38:49):
Give me some stars, a follow, areview that would be great,
okay, thank you once again fortuning in.
This is Frank Vasquez with RiskParty Radio signing off Holiday
Road, holiday Road.
(39:11):
Holiday Road Holiday.
Queen Mary and Voices (39:32):
Road.
The Risk Parody Radio Show ishosted by Frank Vasquez.
(40:02):
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 littlestatesmen and philosophers and
divines.
Uncle Frank and Voices (00:10):
If a man does not keep pace with his
companions, perhaps it isbecause he hears a different
drummer.
Queen Mary and Voices (00:17):
A different drummer and now,
coming to you from dead centeron your dial, welcome to Risk
Parity Radio, where we explorealternatives and asset
allocations for thedo-it-yourself investor,
Broadcasting to you now from thecomfort of his easy chair.
Here is your host, FrankVasquez.
Uncle Frank and Voices (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.
Queen Mary and Voices (00:50):
Yeah, baby, yeah.
Uncle Frank and Voices (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.
Queen Mary and Voices (01:27):
Top drawer, really top drawer.
Uncle Frank and Voices (01:31):
Along with a host named after a hot
dog.
Lighten up, francis.
But now onward, episode 455.
Today, on Restorative Radio,we're just going to do what we
do best here, which is attend toyour emails.
Before we get to that, onelittle announcement we're about
(01:58):
to go on hiatus here for thenext few weeks and this will be
the last episode you'll hear forabout a month.
We'll probably make a new onearound October 11th or 12th,
whatever that weekend is.
We're going on vacation.
(02:27):
I will try to update thewebsite in the meantime, but I
can't make any promises.
Forget about it In any event.
Sometimes when I go on hiatus,people wonder if something bad
happened to us.
And it's gone Poof.
I want to assure you nothingbad is going to happen to us.
Should be pretty good, actually.
Queen Mary and Voices (02:48):
The best, jerry the best.
But now, without further ado,here I go once again with the
email.
Uncle Frank and Voices (02:56):
And First off, first off, an email
from Chris.
Queen Mary and Voices (03:02):
I want to hold him like doing Texas plays
.
Fold them, let them hit me,raise it.
Baby, stay with me, I love it.
Uncle Frank and Voices (03:11):
And Chris writes.
Queen Mary and Voices (03:13):
Uncle Frank and Queen Mary.
I've been a listener since yourearly episodes and truly
appreciate all the informationand knowledge you have
synthesized for all of us.
I have learned so much and amattempting to construct a
(03:39):
retirement portfolio for my wifeand me.
To show my appreciation, I havedonated to the Father McKenna
Center via registering for theWalk for McKenna See the
screenshot below.
I live in Indiana so because ofdistance, I donated a little
extra in the hopes that I couldget one of those awesome
t-shirts size large with theRisk Parity Radio at the top
mailed to me.
(03:59):
Yeah, baby.
Yeah.
My wife and I are currently 40years old and, depending on
market returns, we should befinancially independent and
completely work-optional inapproximately four years.
We are currently 100% inequities and I am struggling to
transition our assets to a riskparity style portfolio because
(04:19):
of limited options in our 401ks.
Limited options in our 401ks.
We have approximately 72% ofour investments in 401ks, 7% in
Roth IRAs and 21% in taxablebrokerage.
We contribute up to the matchin our 401ks, max out our IRAs
and everything else goes to thetaxable brokerage.
The 401ks offer various equityfunds, target date funds and a
(04:43):
bond fund or two.
Do I move some to bonds, eventhough they're not the preferred
treasuries, or do I hold mybreath that we don't experience
a sharp downturn and transfer tothe desired allocation after we
can roll one or both over to anIRA?
I wanted to get your thoughts onthe portfolio I have
constructed.
It meets the guidelines youhave discussed, but I think I
(05:04):
need to hear it from your mouththat it's good, or for you to
offer up some suggestions 25%large cap growth, a mix of S&P
500, total market and VUG.
25% small cap value, viov andAVUV.
20% long-term treasuries, 10%VGLT and 10% GOVZ, to be more
(05:28):
like a 25% allocation.
12.5% gold, gldm, 12.5% managedfutures, dbmf and or KMLM.
5% property and casualty.
1% each TRV, all CB, pgr, brk,b.
I'm still a little fuzzy onGOVZ.
(05:51):
Can you explain how these stripsfunds work?
Do I need more than one managedfutures fund or should I just
choose one and stick with it?
Should I direct index the PNCor just pay the management fee
of KBWP?
I like the idea of directindexing, but what kind of rules
would you put in place todecide if one of the individual
(06:11):
companies should be swapped outfor another in the future?
I've toyed with the idea oftaking 2.5% from the gold and
managed futures.
Any suggestions for that 5%?
If I were to do that, I bounceback and forth between wanting
more growth and smoothing outthe ride with a higher expected
safe withdrawal rate.
I hope this wasn't too long.
I don't want Mary to be bugging.
(06:32):
Thanks again for all you dowith the podcast.
Keep up the great work and theentertaining soundbites, chris.
Uncle Frank and Voices (06:44):
Mary.
Mary, I need your huggin' Well.
First off, thank you for beinga donor to the Father McKenna
Center.
As most of you know, we do nothave any sponsors on this
program.
We do have a charity we support.
It's called the Father McKennaCenter and it serves hungry and
homeless people in Washington DC.
Full disclosure I am on theboard of the charity and am the
(07:06):
current treasurer.
But if you give to the charity,as Chris has done here, you get
to go to the front of the emailline.
Actually, all of our emailerstoday have gone to the front of
the line for that reason.
Yes, there are two ways to dothat.
Either you can do it throughthe Father McKenna website, at
the donation page, or you canbecome a patron on Patreon,
(07:28):
which you do through the supportpage at wwwriskparityradiocom,
and either way, we'll move youto the front of the email line.
Just make sure you reference itin your email.
And for those of you who gaveto the top of the t-irt campaign
and do actually want yourT-shirts, oh, boy is this great.
(07:49):
You can send a request for thatstraight to Ben at the Father
McKinnon Center, if you didn'talready put it in your note in
the box when you made yourdonation.
Or send me an email.
Make sure you include the sizeand your address and I will talk
to Ben and get those sent outas soon as we can.
Or send me an email.
Make sure you include the sizeand your address and I will talk
(08:11):
to Ben and get those sent outas soon as we can.
We have top men working on itright now.
Who Top men?
All right now.
Let's get to your questions.
Now you mentioned you should befinancially independent in about
four years, but I wasn't surehow far you are in terms of
(08:33):
reaching your FI number, as inwhat the percentage is, because
if it's 80% or over, then, yeah,you should probably start
making some transitions here,particularly if you have any
flexibility on the time ofretirement.
And yeah, the easiest thing todo, particularly if you have
large 401ks or IRAs traditionalones is to build out that bond
(08:55):
allocation in that account, evenif it's not the exact treasury
bonds you want.
You can just use a total bondmarket fund or something similar
at this point, because once youmove it off to an IRA, then you
can transition it to the exactbonds you want.
Really, the main purpose of itnow is to take some of that risk
off the table, and anyreasonable bond fund can suit
(09:16):
that purpose for a short periodof time.
Make sure you stay out of thosetarget date funds.
People are actually catching onto how bad these things are.
You know I first talked aboutthis back in episode 333 a while
ago, but the most recentRational Reminder podcast with
Ben Felix came out and they wentover a study by an academic
(09:38):
researcher at the University ofArizona which showed these
things are really bad in termsof long-term accumulation and
they're basically like putting a1% drag on what you're doing
when you compare them to justbasic index fund investing.
Now, I know you don't have thatproblem given what you've said,
but I will link to that podcastin the show notes.
(09:59):
If you have any doubts aboutthe problems with target date
funds and why you should not beusing them, listen to that and
you can get the paper that theyrefer to as well.
But that's not the first paperto come to this same conclusion.
So in de-risking your portfolioin the near term, the most
important thing is to deal withthose macro allocations.
(10:21):
So get that allocation tostocks approximately what you
want it to be, the allocation tobonds approximately what you
want it to be and thealternatives as best you can
deal with it at this point intime, which might mean buying
something now in the taxableaccount and then switching
things up later on or doingsomething in the Roth Now.
Looking at this sample orplanned portfolio you've got
(10:44):
here, I think this fits the bill.
It conforms with all of thethings that make a portfolio
have a higher safe withdrawalrate.
It's got between 40 and 70percent in stocks.
Looks like 55 percent.
The way you have it structurednow Looks like at least half of
that is tilted towards value.
Looks like you've got between15 and 30 percent in long and
(11:05):
intermediate treasury bonds andthen you've got between 10 and
25 percent in alternatives andyou don't have an excessive pile
of cash.
I notice you also have whatBill Bengen thinks is the sweet
spot for a stock equityallocation, which is 55 percent,
which is good.
You need somebody watching yourback at all times.
(11:26):
Make sure you listen to thelast podcast where we talked a
little bit more about those kindof factors and that kind of
research.
All right, looking at your nextquestions, let's deal with the
property and casualty insurancecompany question first.
I would probably just pay theKBWP management fee in this case
, although it kind of depends onwhat the overall allocations
(11:48):
are.
Since your overall allocationto these is going to be so small
, the extra added fee isn'tgoing to be that large in the
grand scheme of things.
Now, it's not wrong to managethem yourself, like I do, but it
will be annoying and I'm notsure you want to go through the
annoyance of it just to save onthat fee on 4% or 5% of your
(12:12):
portfolio.
Because, as you surmise, assoon as you start direct
indexing something like that,you have to come up with other
rules or guidelines to handlewell what happens to this part
of the portfolio.
The way I tend to look at thatpart of our portfolio, which is
somewhere around 8% to 10% thatwe have in property and casualty
insurance companies is first, Ijust consider the whole
(12:34):
allocation to all of the stocksas one big allocation in terms
of comparing that to otherthings.
So in your case I would not belooking at 1% of each one of
those things.
I would consider that 4% or 5%if you're considering Berkshire
as part of that, and so that iswhat you'd be comparing to your
other asset allocations forrebalancing purposes, because
(12:57):
really you want to avoid makingtoo many transactions with those
individual allocations.
Other than that, I would justplan on essentially holding them
forever and selling pieces ofthem whenever it seemed
appropriate or buying more ofsomething, but that would be the
place where you would buy anadditional company or something
like that.
It would be if you ended upbuying into the allocation
(13:20):
because you're rebalancing intoit.
At that point in time I mightconsider buying a different
company that's in the sameallocation.
Other than that, I'd probablyjust kind of let the winners run
, because that seems to workbest for individual stocks, even
though it's counterintuitiveand we're not talking about
gigantic allocations, whichwould be a different kettle of
fish.
You're going to need a biggerboat.
(13:43):
Okay, now you mentioned whethertaking five percent out of the
gold and managed futures wouldmake sense and what you would
put it in.
Well, it could make sense.
You could put it ininternational growth or
international small cap value orsome combination of those if
you wanted more stocks.
You could put it in cash if youwanted to be more conservative
and just take out from that cashallocation or bucket, if you
(14:05):
will.
Or maybe you want to do somekind of rising glide path thing,
like we talked about in episode454 and in Bill Bengen's new
book, whereas you start withthat allocation but then you
reallocate maybe 1% to equitiesfor the next five years or some
period over time.
But I have to tell you, all ofthat is making this a lot more
(14:27):
complicated than it really needsto be, because I'm not sure any
of those things is going tohave a big difference on your
overall performance of thisthing over long periods of time.
Next question do you need morethan one managed futures fund?
The answer is no.
You could have more than one.
Again, if you want to fiddlewith that, you will get slightly
(14:51):
better diversification, but Idon't know if you'd get better
performance ultimately, and thetotal allocation to this asset
class just isn't that great.
So I would probably just useDBMF in most circumstances,
because that is the closestthing we have to an index fund
in this category right now.
We have new funds that havecome out recently, but I can't
tell you that much about them,and DBMF has been around long
(15:11):
enough that we have a reallygood idea of how it's likely to
perform in the future, at leastrelative to other things in the
same class.
And finally, you asked aboutSTRIPS GOVZ in particular.
What are Treasury STRIPS?
Believe it or not, that's anacronym.
It stands for Separate Tradingof Registered Interest and
(15:33):
Principal Securities.
Inconceivable, isn't that amouthful?
But basically what they'redoing is taking apart a bond and
separating the principal partof it from the coupons or the
interest paying part of it, andwhat you're really getting with
respect to the strips is thebond part of it that doesn't
include the interest.
Now you can look this up onchat, gpt or Grok or your
(15:57):
favorite artificial intelligenceto explain to you exactly how
these work, because if I try todo it on this podcast, it'll be
very confusing.
But the upshot of it is you endup, when you put these things in
a fund and you got a wholebunch of them is you end up with
something that acts like along-term bond with longer
(16:17):
duration than standard long-termtreasury bonds, and so
typically, a long-term treasurybond fund like VGLT is going to
have a duration of about 17years or something like that,
whereas a STRIPS fund is goingto have a duration of about 25
years.
The way that plays into yourinvestments is that the longer
(16:39):
duration funds are moresensitive to changes in interest
rates.
So if the change in the overallinterest rates depending on
where you are in the curve goesdown, say 1%, a long-term
treasury bond like VGLT islikely to go up somewhere
between 15 and 20% and a stripsfund is likely to go up
(17:00):
somewhere between 20 and 30%,and the same thing happens on
the other side of it wheninterest rates go up somewhere
between 20 and 30 percent, andthe same thing happens on the
other side of it.
When interest rates go up,these tend to go down in value.
That's why what they do is makegood recession insurance,
because that's what happensduring a recession.
Other than that, like prettymuch all bonds are kind of a
mediocre return driver.
So it was why you don't want tobe having 30 or 40 percent of
(17:22):
these things in your portfolio.
Now they do also pay an annualyield, although technically it's
not actually interest.
It's just a mechanism how thefunds are operated to
essentially simulate that asthey roll these things over and
as they manage them in the fund.
But they do have a relativelypredictable yield that you can
(17:44):
look up on Morningstar, and sothe general way they function in
a portfolio is they behave asif they were a levered version
of a long-term treasury bondfund and the leverage is about
1.5 to 1, if you're looking athow they behave when interest
rates are moving, which is whatyou care about the most.
So, as you surmise, your 10%long-term treasury bond
(18:08):
allocation and your 10% stripsallocation is going to behave a
lot like a 25% allocation tojust the long-term treasury
bonds, and you don't need toknow all those mechanics of how
these things work in practice,although it's probably a good
idea to spend some time with anartificial intelligence just to
educate yourself so you canunderstand how it all works
(18:30):
internally.
Anyway, hopefully that allhelps.
Thank you for being a donor tothe Father McKenna Center and
thank you for your email.
Bow to your sensei.
Bow to your sensei.
Second off, second off.
We have an email from George.
Queen Mary and Voices (18:51):
So, george, what?
Uncle Frank and Voices (18:51):
does Art Vandelay?
Queen Mary and Voices (18:53):
import.
And George writes Hi Frank, Iheard your rant about many
financial planners, such as therocking retirement guy, doing
little more than entering yourinputs into a planning tool and
producing a pretty report basedon Monte Carlo simulations.
That's not an improvement.
I have been using the PerlanaRetirement Calculator for
(19:15):
several years and believe it isthe best high-fidelity tool for
analysis on the market today.
It was designed by an engineerlike us and is very robust.
I don't know if you have lookedat Perlana, but I would be
curious to hear what you thinkabout it.
The reports generated byPerlana are quite useful,
especially for providing adetailed summary for my CEO, my
(19:36):
wife George.
I don't get it.
There's no human fund.
Those donation cards were fake.
I also have access toMoneyGuide Pro, the same one
used by Roger of RockingRetirement, but I found it is
medium fidelity at best, george.
Uncle Frank and Voices (19:53):
Georgie, would you like some jello?
Why'd you put the bananas inthere?
George likes the bananas.
Well, thank you also for beinga donor to the Father McKenna
Center, George.
It is greatly appreciated,George we've got a problem.
Queen Mary and Voices (20:10):
There's a memo here from accounting
telling me there's no such thingas the human fund.
Uncle Frank and Voices (20:19):
Well, there could be, and I know
you've written before and I doappreciate your emails and
questions.
Now getting to your question,pralana, so I don't spend a
whole lot of time analyzingthese calculators because I find
that they almost all have thesame advantages and drawbacks to
(20:39):
them, just in slightlydifferent ways.
I know it's very popular totalk about these a lot, to
compare them a lot.
There are a lot of podcastersand other people now who are
actually making a lot of moneypromoting various calculators.
So if you hear aboutcalculators on a particular
podcast or venue, you shouldprobably look up and see whether
(21:02):
they are getting paid, becausea lot of people are getting paid
.
A lot more people are gettingpaid than you think.
So all of these calculators arevery good at the basic
spreadsheet functions that youwould ordinarily do on Excel
spreadsheets, and that isorganizing your expenses and
inputs for those sorts of thingsand then also analyzing
(21:25):
different cash flows as they maystart or stop over a period of
time, and you can do this onthose kind of calculators and
get nice, pretty charts out ofthem.
Or you can do it at PortfolioVisualizer for free at the
Financial Goals tool, or you cando it on your own spreadsheets
if you're so inclined, because Istarted doing these kind of
(21:46):
projections a long time ago,before most of these things
existed, and I can tell youthey're actually not improving
people's forecasting abilities.
They're probably detracting fromthem overall, because there's a
lack of understanding as towhat's going on under the hood,
whereas if you actually did iton a spreadsheet, you'd have a
better feel for what was reallygoing on.
(22:06):
So what I just described inthese calculators calculating
expenses, dealing with cashflows, those sorts of things
that goes to what we talkedabout last time in the last
episode about good forecastingtechniques and the difference
between risk and uncertainty.
All of what I'm talking aboutfalls into the risk category,
and so the more calculating youdo of it, the better
(22:29):
understanding you're going toget of it.
Particularly when you'retalking about expenses, if
you're not going too far outinto the future and if you have
known cash flows like socialsecurity that are going to
appear at a particular time,that is also a very good use of
these calculators.
Where these calculators tend tofall down is on the uncertainty
(22:50):
part of these projections,which has to do with actually
projecting the returns of aportfolio, and the reason they
fall down there is becausethey're often black boxes using
embedded crystal balls that comefrom various sources.
Queen Mary and Voices (23:08):
As you can see, I've got several here.
Uncle Frank and Voices (23:10):
A really big one here, which is huge.
Queen Mary and Voices (23:15):
This is the one that I tend to use more
often.
I have a calcite ball and Ihave a black obsidian one here.
Uncle Frank and Voices (23:26):
And so they are not actually modeling
historical returns, which wouldbe the base rates and what you
should start with when you'remodeling returns.
The historical long-termreturns are your base rates that
you're supposed to be workingwith.
If you're using other things,you're using crystal balls.
Queen Mary and Voices (23:44):
Now the crystal ball has been used since
ancient times.
It's used for scrying, healingand meditation.
Uncle Frank and Voices (23:53):
And most of these calculators are using
other things, because, insteadof using historical returns,
they're using what are calledparameterized returns, where you
say that a particular assetclass, or sub-asset class you
think, is going to have a returnof a particular amount and it's
going to have a certainstandard deviation.
(24:13):
And there are severalfundamental problems with
modeling something that way.
The first one is unless this islined up with something that
relates to historical returns,it could be wildly inaccurate.
Forget about it.
And if you're using differentcrystal balls for different
assets, then you don't haveconsistency amongst your crystal
(24:36):
balls.
The crystal ball is a standardpiece of equipment for any
modern fortune teller, but wheredo crystal balls come from?
Gazing into the orb is supposedto give the soothsayer a vision
of the future, which will thenbe shared with the client for a
fee.
And then, finally, this istreating all of these assets as
independent variables, which isnot true at all.
(24:59):
All of your performance, ofyour assets are dependent
variables because they aredependent on the environment in
which they exist at theparticular time the economic
environment.
So in a recessionaryenvironment, you do not expect
stocks to do well, you do expectbonds to do well If you model
these things as independentvariables.
(25:19):
You can essentially be modelingone in a recession and one in
an inflationary period at thesame time, and that is a
fundamental problem with usingparameterized returns.
That cannot be corrected.
So Prolana has this sameproblem that other calculators
have that use parameterizedreturns because that's how its
returns are set up.
(25:40):
Now it's interesting.
I didn't spend a lot of timelooking at Prolana websites.
I did talk to a couple ofdifferent artificial
intelligences about the defaultsettings for Prolana.
Chatgpt says it does not havedefault settings but just allows
you to set them up, which isactually the preferable way to
go, because you would want toknow what the source of the data
(26:01):
is you're using for theparameterized returns and make
sure it's consistent over all ofthe asset classes you're
putting into this sort of thing.
And you don't know that ifyou're just using default
returns of thing, and you don'tknow that if you're just using
default returns.
Now Grok says that Perlanaactually does have default
parameterized returns andaccording to Grok I don't know
(26:23):
whether this is completelyaccurate it is using 5% as the
real return for stocks.
So these are all inflationadjusted.
It's using 5% for internationalstocks.
It's using 5% for REITs.
It's using 1% to 2% for bonds,it's using 1% for international
bonds, it's using 1% for tips,it's using 0% to 0.5% for cash
(26:49):
and using 0% to 1% for otherthings like commodities or gold.
I could tell you those aregenerally all bad return
assumptions.
They are essentiallysubtracting 3% from historicals,
2% to 3% from historicals.
They appear to be based onthese valuation metric kind of
(27:11):
forecasts that Vanguard does orMorningstar does sometimes.
Those have been miserablefailures for at least the past
15 years and there is no reasonanyone should be using them
because they are more likely tobe wrong in the future than
simply using base ratehistorical returns.
And since those are not baserates but based on a crystal
(27:34):
ball, based on currentconditions, if you will.
Queen Mary and Voices (27:39):
Now you can also use the ball to connect
to the spirit world.
Uncle Frank and Voices (27:43):
That's just bad forecasting.
That's not how you do goodforecasting.
You're supposed to use baserates, like we talked about last
time, not make up things from acrystal ball that says things
are going to be worse than theywere before, better than they
were before, or blah, blah, blah.
Queen Mary and Voices (27:57):
That's not how it works.
That's not how any of thisworks.
Uncle Frank and Voices (28:02):
So if Perlana is actually using those
as its default settings, that ispretty much worthless and you
shouldn't be using it.
You need to go in and set thosethings for yourself, based on
things that you think areactually reliable and that have
actually been predictive in thepast.
Unfortunately, you're not goingto find any crystal balls that
(28:22):
are more predictive than simplyusing historical base rates.
Queen Mary and Voices (28:26):
That's the fact, Jack.
That's the fact, Jack.
Uncle Frank and Voices (28:31):
But it may be a useful exercise to
compare those kind ofprojections to historical
projections and you can usesomething like Portfolio
Visualizer for that.
Portfolio Visualizer actuallylets you do it both ways.
It lets you do it historicallyand is going to do horribly in,
say, the first 10 years of thiscentury, because it hasn't
(29:00):
really been tested on that kindof basis and is likely to be
modeling things that have neveroccurred and are never likely to
occur.
The way financial advisorstypically try to get around this
is by doing these parameterizedforecasts, using these
calculators and then going backand doing simulations of how
whatever you come up with wouldhave done in, say, 1987 or 2008
(29:25):
or whatever bad period 1973,1974.
And that is kind of used toattempt to solve this problem of
not having done ahistorical-based forecast in the
first place.
So where I come out on this isthat you should not be using
Perlana's default settings, ifthey are in fact what Grok says
they are.
(29:46):
If you're going to put them inyourself, you need to make sure
you've done the actual researchand are comfortable with those
parameterized returns search andare comfortable with those
parameterized returns.
But in any event, you stillshould do independently
historical-based forecasting andor looking at worst-case
scenarios based on historicalevents, Because whatever you get
(30:06):
out of these parameterizedprojections should be not too
far from what the historicalswould suggest.
Otherwise, you know you arejust going off the reservation
as far as good data science isconcerned and you're not
adhering to something that'scalled the bias-variance dilemma
, which says the more preciseyou try to be with, the more
(30:29):
inputs you try to put intosomething, the more likely it's
going to be wildly inaccurateafter you put it through some
kind of forecasting orcompounding calculator.
And that is pretty much exactlywhat you're doing when you're
doing a set of parameterizedreturns.
So those are my thoughts.
Hopefully that was helpful anddidn't get down into too many
weeds.
(30:49):
But you do need to get intoweeds if you're actually going
to talk about good and badforecasting methodologies.
And thank you for being a donorto the father mckenna center
and thank you for your email youcan't go.
Queen Mary and Voices (31:02):
Who's gonna do the feats of strength?
How about george?
Uncle Frank and Voices (31:07):
good thinking, cougar.
Until you pin me, george.
Queen Mary and Voices (31:13):
Festivus is not over oh, please someone
stop this.
Uncle Frank and Voices (31:18):
Let's rumble.
Queen Mary and Voices (31:20):
I think you can take him, Georgie, Come
on be sensible.
Uncle Frank and Voices (31:24):
Stop crying and fight your father.
Ow Ow, I got it.
This is the best Festivus ever.
Last off, Last off.
We have an email from I have noname.
Queen Mary and Voices (31:37):
You got a name, do you?
I have no name.
Well, that right there may bethe reason you've had difficulty
finding gainful employment andI have no name rights.
Queen Mary and he whosegreatness in this endeavor will
echo for a very long time intothe unknowable future.
Ha ha.
(31:58):
For retirees, who think thatrisk parity sounds nice, but
they worry about the lack ofbuckets, I introduced the Golden
Butterfly Bucket of Buckets.
Surely you can't be serious.
I am serious and don't call meShirley.
Start with the retirementbucket and fill it with the
equivalent of 25 years ofexpenses.
Inside of this bucket there arefive more buckets which each
(32:22):
receive the equivalent of fiveyears of expenses and are
invested in low-cost index funds.
One, a large bucket, investedin large-cap blend.
Uncle Frank and Voice (32:34):
Excellent .
Queen Mary and Voices (32:36):
Two a small bucket invested in
small-cap value.
Uncle Frank and Voices (32:40):
I'm telling you, fellas, you're
going to want that cowbell.
Queen Mary and Voices (32:44):
Three a bond bucket invested in
long-term bonds.
That's what I'm talking about.
Four a cash bucket invested inshort-term bonds.
Uncle Frank and Voices (32:54):
Always money in a banana stand.
Queen Mary and Voices (32:57):
And five, a golden bucket invested in
gold.
I love gold.
Each month, remove theequivalent of one month of
expenses from the bucket thathas the highest value at the
time.
Let's do it.
Uncle Frank and Voices (33:13):
Let's do it.
Queen Mary and Voices (33:18):
And there you have it, problem solved.
Uncle Frank and Voices (33:21):
I'm happier than a peg and slop.
Queen Mary and Voices (33:23):
For retirees who love buckets.
You can thank me by donating tothe Father McKenna Center
Sincerely.
I have no name.
I hate this place.
Geographical oddity.
Uncle Frank and Voices (33:34):
Two weeks from everywhere.
Queen Mary and Voices (33:36):
PS For retirees who really just want
one bucket.
Please also consider the Obtraportfolio.
Uncle Frank and Voices (33:42):
One bucket to rule them all and in
the darkness bind them in theland of Mordor where the shadows
lie, One bucket to rule themall.
Eh, this was a very amusingemail.
(34:03):
What is one good?
Some kind of fun house, whyhaving fun?
And thank you also for being adonor to the father mckinnon
center, before I forget.
But I think what this reallyillustrates is the problem I see
with a lot of the labeling andcutesy names and other things
(34:24):
that go on in financial planning, particularly when you're
talking about time-segmentedstrategies which may involve
buckets, ladders, hoses andflowerpots and pie cakes.
And that is looking at personalfinance and separating what is
finance from what is personal.
And in this context, whatpersonal means is?
What is psychology?
(34:46):
What is being put in place tomake it easier for the user to
either comprehend or to be ableto stick with, and putting
things in buckets and labelingthem is psychology.
It is not finance.
Queen Mary and Voices (35:01):
I am a scientist, not a philosopher.
Uncle Frank and Voices (35:04):
Because it does not improve something
like the safe withdrawal rateoverall and, in fact, may
detract from it and or may makeit more difficult for you to
manage the portfolio, becausethe performance of the portfolio
is based on the assetsthemselves and how they are put
together, how they are mixed.
After that.
(35:25):
It's not influenced by whatorder you put them in, or how
many buckets you have, or whatlabels you put on them or what
future expenses you assign themto.
All of those things may beconvenient for various reasons.
Oh how convenient.
But they don't change how theportfolio is going to perform
(35:47):
and how the plan is going towork overall.
And your email makes a greatillustration of that, because
what you've described is afive-bucket strategy with all
the bells and whistles anyonecould want, but when you break
it down, it's the exact same waywe look at and manage the
golden butterfly portfolio onthe website, without any
(36:07):
reference to buckets at all.
Queen Mary and Voices (36:10):
No triple at all.
Uncle Frank and Voices (36:11):
Now, I don't mind that people want to
use psychological tools toeither help manage or help
present a plan to a client, orwhatever, but the problem is
confusing the psychologicallabels and tools with the actual
finance and performance of theassets, and that's what happens
(36:32):
often.
It mostly happens when peoplethink that by having buckets of
cash or things like that solvessequence of returns risk.
It does not solve sequence ofreturns risk, at least any
sequence of returns risk youactually care about, and the one
you care about is about adecade long.
It's not two or three years, orit's not even five years.
(36:52):
The problem with having adecade-long cash or bond ladder,
though, is it's probably goingto be very inefficient.
Queen Mary and Voices (37:00):
I could have told you that.
Uncle Frank and Voices (37:03):
So if you want to be knowledgeable, or
more knowledgeable, about howall this stuff works in terms of
financial planning andportfolio construction, you do
need to sit down and look at aplan and be able to separate out
which are the financial aspectsof this plan and which are
psychological aspects of it,because anything that is
involving arranging thelollipops on the good ship
(37:25):
lollipop and hoping they tastebetter that way is just
psychology.
It's not finance.
Good ship lollipop, it's asweet trip to the candy shop
where fun fun's, and the soonerwe stop confusing those two
(37:47):
things, the better we will be atcomprehension and real planning
, as opposed to exercises andlabeling.
Stupid is what stupid does, sir.
So thank you for that veryamusing email that illustrates
an important point.
Those are the best kind, aren'tthey?
That's gold, jerry gold, andthank you for being a donor to
(38:08):
the Father McKenna Center again,and thank you for your email.
But now I see our signal isbeginning to fade.
If you have comments orquestions for me, please send
them to frankatriskpartyradarcom.
That email isfrankatriskpartyradarcom.
Or you can go to the website,wwwriskpartyradarcom.
That email isfrankatriskpartyradarcom.
Or you can go to the websitewwwriskpartyradarcom.
Put your message into thecontact form and I'll get it
(38:28):
that way.
Then maybe someday in thefuture I'll actually take a look
at them After we're donevacating.
Looks like you've been missinga lot of work lately.
I wouldn't say I've beenmissing it, bob.
In the meantime, if you haven'thad a chance to do it, please
go to your favorite podcastprovider and like subscribe.
(38:49):
Give me some stars, a follow, areview that would be great,
okay, thank you once again fortuning in.
This is Frank Vasquez with RiskParty Radio signing off Holiday
Road, holiday Road.
(39:11):
Holiday Road Holiday.
Queen Mary and Voices (39:32):
Road.
The Risk Parody Radio Show ishosted by Frank Vasquez.
(40:02):
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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