In this episode we answer emails from Tyson, Patrick, and Shuchi. We discuss the basics of transitioning, SCHD as a value fund choice, bitcoin vs. gold, why "only works for 30 years" is a fake problem, the difference between our use of value funds vs. Paul Merriman's, and when would me make adjustments to our plans in retirement.
Links:
Bigger Pockets Money Podcast #1: The Secret to a 5% Safe Withdrawal Rate | Frank Vasquez
Bigger Pockets Money Podcast #2: We Built a 5% SWR Retirement Portfolio Using Fidelity in 48 Minutes (Golden Ratio Portfolio)
Morningstar Analysis of SCHD: SCHD Stock - Schwab US Dividend Equity ETF | Morningstar
Golden Ratio Portfolio on Portfolio Charts: Golden Ratio Portfolio – Portfolio Charts
Retirement Spending Calculator: Retirement Spending – Portfolio Charts
Drawdowns Calculator: Drawdowns – Portfolio Charts
Michael Batnick Critique of CAPE Ratio "Predictions": Stocks Are More Expensive Than They Used to Be
Breathless AI-Bot Summary:
A plan that survives contact with the market looks different from the one you sketch on a napkin. We break down the 80 percent FI pivot—why shifting from an aggressive accumulation mix to a retirement-ready allocation a few years early can defuse sequence risk without surrendering growth—and show how to decide when to pull that lever without second-guessing every blip.
We also tackle one of the most popular questions right now: can Bitcoin replace gold? Short answer: not for core diversification. Gold’s role as a Basel III Tier 1 reserve asset and its central bank demand make it a unique stabilizer in a way that risk-on assets can’t duplicate. Bitcoin behaves more like a levered tech proxy, which is interesting for satellite bets but insufficient as an anchor. On equities, we explain why splitting the stock sleeve between growth and value—think a broad growth-leaning fund paired with a true value fund like SCHD—creates the performance dispersion that fuels rebalancing gains during stress, raising durability without betting on factor outperformance.
If the 30-year rule worries you, breathe. Withdrawal rates flatten as horizons extend, and real-world retiree inflation typically runs 1 to 2 percent below CPI, offsetting the longer timeline. Add simple guardrails—pausing raises, trimming discretionary spend in bad years—and you can boost sustainability by about a percentage point. The key is to know your portfolio’s historical drawdown depth and length, set bright lines for action, and avoid valuation-based fortune-telling. Diversification and disciplined rebalancing beat crystal balls.
If you found this helpful, follow the show, leave a review, and share it with a friend planning their FI transition. Your support helps more DIY investors build portfolios designed to last for life.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Voices (00:00):
A foolish consistency is the hobgoblin of little mind,
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 Queen Mary (00:18):
And now, coming to you from Dead Center
on your dial, welcome to RiskParity Radio, where we explore
alternatives and assetallocations for the
do-it-yourself investor.
Broadcasting to you now fromthe 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 have just stumbled inhere, you will find that this
podcast is kind of like a divebar of personal finance and
do-it-yourself investing.
Voices (00:52):
Expect the unexpected.
Mostly Uncle Frank (00:55):
There are basically two kinds of people
that like to hang out in thislittle dive bar.
Voices (01:00):
You see, in this world, there's two kinds of people, my
friend.
Mostly Uncle Frank (01:04):
The smaller group are those who actually
think the host is funny,regardless of the content of the
podcast.
Voices (01:12):
Funny how?
How am I funny?
Mostly Uncle Frank (01:14):
These include friends and family and a
number of people named Abby.
Voices (01:20):
Abby someone.
Mostly Uncle Frank (01:22):
Abby who?
Voices (01:23):
Abby Normal.
Abby Normal.
Mostly Uncle Frank (01:29):
The larger group includes a number of
highly successful do-it-yourselfinvestors, many of whom have
accumulated multimillion dollarportfolios over a period of
years.
Voices (01:42):
The best, Jerry.
The best.
Mostly Uncle Frank (01:45):
And they are here to share information and
to gather information to helpthem continue managing their
portfolios as they go forward,particularly as they get to
their distribution ordecumulation phases of their
financial life.
Voices (02:04):
What we do is if we need that extra push over the cliff,
you know what we do?
Put it up to a nevin, exactly.
Mostly Uncle Frank (02:11):
But whomever you are, you are welcome here.
But now onward, episode 461.
Today's party radio, we're justgoing to do what we do best
here.
Which means we're going toanswer your emails.
Voices (02:32):
I could have told you that.
Mostly Uncle Frank (02:34):
And so without further ado.
Voices (02:36):
Here I go once again with the email.
Mostly Uncle Frank (02:40):
And first off.
First off, we have an emailfrom Tyson.
Voices (02:47):
Like you have my favorite quote that everybody
has a plan.
Sometimes they punch you backin the face.
Yeah, I have a plan too, yougotta be careful with that.
Mostly Uncle Frank (02:59):
And Tyson writes.
Mostly Queen Mary (03:01):
Hi Frank, I hope you're doing well.
I just wanted to thank you forthe great podcast I recently saw
on Bigger Pocket's Money.
Voices (03:08):
Shall we?
Mostly Queen Mary (03:10):
It was extremely knowledgeable and
insightful, and I reallyappreciated how clearly you
explained the concepts.
One, you mentioned that weshould shift to the recommended
allocation once we're at 80% ofour fire number.
My question is, at that 80%point, do you simply adjust the
(03:34):
allocation and let it ride untilyou reach your full fire number
before starting withdrawals?
Or do you actually begin thewithdrawals at that 80% point?
For example, if my fire numberis $5 million and I change the
allocation at $4.5 million,should I let it grow to $5
million before withdrawing orstart withdrawals right at $4.5
(03:57):
million?
2.
In your model you allocate aportion of gold.
Given that Bitcoin is oftenreferred to as digital gold, and
it has performed very well forme over the past six to seven
years, do you think it could bea reasonable substitute for gold
in this strategy, especiallyfor millennials?
That's not how it works.
That's not how any of thisworks.
(04:19):
Or do you suggest sticking withtraditional gold for the sake
of stability?
Voices (04:24):
Yes!
Mostly Queen Mary (04:25):
Three, for the stock portion, you suggested
splitting it half value andhalf growth.
For the value half, would it bereasonable to use SCHD instead
of the specific ETFs or fundsyou mentioned in the podcast?
Four, is this portfoliodesigned to last for 30 years or
for life?
And it's gone.
(04:46):
I'm currently 40 years old andexpect to reach my fire number
in about two years.
Since I don't plan on dying anytime soon, I'd like to be
reassured that this portfoliocould sustain me for the rest of
my life, not just threedecades.
Thank you again for sharingyour expertise.
Your breakdown of theseconcepts has been incredibly
(05:08):
helpful, and I look forward tohearing your thoughts.
Best regards, Tyson.
Mostly Uncle Frank (05:14):
Well, hello, Tyson.
Voices (05:16):
One question.
How do you come up with thesaying everyone has a game plan
until they get punched in theface?
It's iconic.
Well, that's what it happened.
Everybody had a game plan untilthey get punched in the face.
Then they gotta go to plan two.
Punch the other guy.
Mostly Uncle Frank (05:30):
I'm glad you enjoyed my appearances on
Bigger Pockets Money.
They were two from last July.
One where I explained thebasics of risk parity style
investing, particularly forretirement portfolios, and then
one where we constructed anactual portfolio that Mindy
Jensen now holds.
I will link to both of those inthe show notes there on
(05:51):
YouTube, as well as podcastproviders, but you can actually
see us on YouTube.
But let's get into yourquestions.
The first one was about theretirement point versus the
transition point.
And the basic recommendationthat I've made and others have
(06:11):
kind of agreed with is that youprobably want to start
transitioning your accumulationportfolio to a retirement
portfolio a few years before youactually enter into retirement
and start living off theportfolio.
And that's the key factor isare you taking money out of this
or putting money into it?
So a good kind of ballparkestimate is if you are about 80%
(06:32):
to the portfolio size that youthink you need, your fire
number, and are a few years out,say five years out, you can
make that transition and thenjust let your portfolio continue
to grow until it reaches thenumber.
So no, you're not taking moneyout of it right away.
The purpose of doing it beforeyou actually retire is simply to
(06:55):
avoid a bad sequence of returnsrisk, because if you're holding
something like a hundredpercent stock portfolio all the
way up to retirement, there's apossibility that two years
before your retirement we havethe year 2000 to 2003 or 2008,
in which case, all of a suddenyou don't have enough to retire.
In fact, you may only have 60%of what you had before.
(07:16):
And so the only way to getaround that, I shouldn't say the
only way, but the mostefficacious way to get around
that is simply to make thetransition at some point earlier
in time.
And the only question is, howearly do you think you need to
be?
The way this works in real lifeis kind of interesting because
almost nobody actually picks onenumber and retires when they
(07:37):
get to exactly that number.
What typically happens is thatpeople have a phi number in mind
and will end up exceeding itbecause they don't want to quit
working.
They're not ready to quitworking, or there's some other
things going on, maybe theirportfolio is growing more than
they expected.
Many other conditions could beaffecting this.
(07:59):
So oftentimes people get to apoint where they're saying 80%
to a Phi number with part oftheir portfolio and can convert
that part of the portfolio, andthen they continue to go on and
accumulate more assets.
And what you do with that moreassets is completely flexible.
I mean, you could invest itaggressively and take your
(08:21):
chances with it because youdon't need it to rely on it, or
maybe you just stick it away incash because you're planning on
taking a big trip or having somelarge expense that you want to
spend extra money on.
So you may have a period intime where you are neither
adding to nor subtracting from aretirement portfolio.
(08:43):
That situation is also modeledby the concept of Coast Fi,
where you accumulate some amountof money early on and then just
put it aside and let it grow,knowing that eventually that
will grow into your Phi number,your retirement number that you
need.
And then in the meantime, youcan go off and just earn money
(09:03):
and spend it and not be worriedabout accumulating anything
anymore.
So there are going to be manydifferent approaches here in
reality, depending on yourparticular circumstances.
The only problem we're tryingto solve with a conversion
sometime before you actually getto financial independence is to
make sure you don't have thatcrash right before you plan to
(09:24):
retire.
That ruins your possibility ofretiring on a date that you had
selected in the past.
Because if you're young enoughand you have a choice, you can
always just keep working in theworst case scenario with that.
If you're older, you may nothave that choice.
And that is actually whatcauses most people to retire is
they are retired by theiremployer or by some other
(09:45):
circumstances.
Now, your second question iswhether you could allocate
towards Bitcoin instead of goldin a portfolio like this.
And the answer is no, at leastnot right now.
Voices (09:57):
Not gonna do it.
Wouldn't be prudent at thisjuncture.
Mostly Uncle Frank (10:01):
Gold has a couple of unique properties that
are unique to gold and do notapply to Bitcoin or just about
any other non-financial asset.
And that is gold is part of theplumbing, if you will, of the
international economic system.
And in particular, it is anasset that is held by central
(10:21):
banks around the world as abackup asset.
So a lot of the demand forgold, particularly these days,
comes from central banks buyinggold as a backup or reserve
asset.
Bitcoin doesn't fulfill thatrole, and really nothing else
does.
That's not a currency or atreasury bond or something like
that.
There's actually a set ofinternational banking
(10:44):
regulations that apply to this,and they're called the Basel
Regulations after the city inSwitzerland, and they're up to
what they call Basel III now.
And under the Basel IIIregulations, gold is a tier one
asset, which means it can beused as a primary reserve asset
by not only central banks, butalso commercial banks in terms
(11:06):
of their regulatoryrequirements.
And that does not apply tosomething like Bitcoin, which is
purely a speculative asset andis driven by private demand in
particular.
One of the problems with itright now is it still seems to
be highly correlated to otherrisk assets, especially
technology-related stocks.
(11:27):
And it does not make a verygood diversifier if it's
correlated with stocks.
Because the point of using analternative asset in one of
these kind of portfolios is thatit has essentially zero
correlation with both stocks andbonds.
That is the kind of alternativeasset you're looking for.
And at least right now, Bitcoindoes not fulfill that
requirement.
Maybe it will in the future,but maybe it won't.
(11:49):
We don't know.
Speaker 14 (11:51):
We don't know.
What do we know?
You don't know, I don't know,nobody knows.
Mostly Uncle Frank (11:57):
So you would not use it as a substitute for
gold in one of these kind ofportfolios.
Voices (12:02):
Forget about it.
Mostly Uncle Frank (12:04):
And we do have an episode about the
potential use of Bitcoin in oneof these kind of portfolios.
It's episode 29, and you willfind it along with all of the
other investment specificrelated episodes on the episode
guide page at the website atwww.riskperdireater.com.
Voices (12:22):
That is the straight stuff, oh funkmaster.
Mostly Uncle Frank (12:25):
It's interesting, at that point in
time it had a volatility thatwas about 10 times that of the
stock market.
It seems to have a volatilityof about three times the NASDAQ
right now, which is important ifyou are considering using it
for sizing.
Right now, it performs like alevered NASDAQ fund.
(12:46):
But these characteristics seemto be changing as this asset
evolves and as it becomes moreaccepted by the large players in
the financial services industrythat now have put out all these
ETFs and things.
But it still would only be usedas an add-on asset and perhaps
a source of leverage in someways.
At least right now.
(13:06):
Alright, your third questionwas whether you could use SCHD
as part of the value allocationin one of these kinds of
portfolios.
And the answer is yes, you can.
That's a good large cap valuefund to use.
It's relatively inexpensive.
And sits way over there on thevalue scale.
(13:27):
And that's the way I tend tolook at funds.
I will run them through theanalyzer there at Morningstar,
which tells you all about them,including where they fall in
terms of growth and value andsize.
The one thing you should knowabout large cap value in
particular is it that it tendsto have both lower volatility
and lower overall returns thanthe rest of the stock market.
(13:48):
Mostly because it's verypredictable or relatively
predictable compared to, say,growth stocks or smaller stocks,
and therefore the market does avery good job at pricing it
accurately.
Voices (14:01):
That's the fact, Jack!
Mostly Uncle Frank (14:03):
So it has traditionally been like a core
holding of designed retirementportfolios, say like the
Vanguard Wellington Fund orVanguard Wellesley Fund, will
have a tilt towards large capvalue.
And if you are modeling in invarious calculators that are
modeling by asset class, youwould model that as large cap
(14:23):
value and would not expect it tooutperform the asset class
generally.
And your last question waswhether these portfolios are
designed to last for 30 years orfor life.
And the answer is the latter.
This business about 30 years,it's a litmus test for me.
Because somebody who does notreally understand how the safe
(14:45):
withdrawal rate works thinks 30years is an important metric.
Am I right or am I right or amI right?
Right, right, right.
All 30 years is, is just youhave to pick some time frame so
that you can compare oneportfolio to another.
But you could have picked 20years, you could have picked 40
years, you could have picked 50years.
(15:06):
Now, as it happens, and we knowthis from both from Bill
Bangin's original research andfrom the current research and
from all of the charts atportfolio charts and elsewhere
where you can look this up, isthat this function is
asymptotic.
So that means as it goes out,the safe withdrawal rate
function to 45, 50, 60 years, itdoes not keep going down.
(15:30):
It flattens out.
And essentially, to go from 30years to forever, you would
subtract about 0.6 from the30-year safe withdrawal rate.
And you can see this in BillBangin's book, or you can just
go to the portfolio charts siteand look up a portfolio, say the
(15:50):
golden ratio portfolio, it'llsay if you do a 30-year
retirement, it has a safewithdrawal rate of 6.1 since
1970, and you go out to 45 yearsand it says 5.4.
So subtract 0.6 or 0.7 if youprefer.
The truth is you get that backthough.
And the way you get that backis that if you are assuming you
(16:13):
are an average retiree, then youshould not be assuming that you
are going to experienceinflation at the rate of the
CPI.
You are going to experienceinflation at the rate of CPI
minus 1% to CPI minus 2%.
That is not the standardassumption.
But if you make the accurateassumption that you are going to
(16:34):
be a typical retiree or be ableto organize your finances in
such a way that you can be atypical retiree, then you should
be using CPI minus 1 to CPIminus 2.
If you do that, it has theeffect of increasing the safe
withdrawal rate by between 0.5and 1%.
So what that means is that foryou, for a retirement that's
(16:59):
going to last, say, 50 or 60years, and you are an average
retiree, that 30-year estimateturns out to be much more
accurate than a long-termestimate that adds CPI
inflation.
Because you subtract the 0.6 or0.7, and then you add back
somewhere between 0.5 and 1.
And guess what?
You get back to that 30-yearestimate using the CPI rate of
(17:22):
inflation.
Voices (17:23):
Did you get that memo?
Mostly Uncle Frank (17:25):
So it's mathematical happenstance, but
that 30-year estimate using CPIinflation is actually a fairly
good estimate for forever usingactual inflation.
Speaker 14 (17:39):
Yeah.
Didn't you get that memo?
Mostly Uncle Frank (17:43):
The bottom line is your portfolio does not
turn into a pumpkin after 30years.
It just doesn't.
That's not the way this works.
(18:08):
That's not the way it's everworked.
If you run into people sayingit only works for 30 years, the
answer is they are wrong andthey don't understand how the
calculation works.
So they're either ignorant orfear-mongering.
Or maybe both.
Or stop using that as a basisto sell their services or lower
(18:55):
the bar for what they are doing.
Voices (18:58):
Because only one thing counts in this life.
Get them to sign on the linewhich is dotted.
Mostly Uncle Frank (19:04):
So, hopefully, those answers help.
I'm glad you're enjoying thepodcast.
And thank you for your email.
Voices (19:22):
Second off.
Mostly Uncle Frank (19:23):
Second off, we have an email from Patrick.
Voices (19:28):
I got you though, SpongeBob!
Mostly Uncle Frank (19:34):
And Patrick Wright's.
Mostly Queen Mary (19:36):
Hi, Frank.
I just heard episode 412, andin the third question from Mr.
Data, he asked why PaulMerriman is a small cap growth
fund, wherein you told him hemust have confused himself as
Paul is a big small cap valueguy.
However, Mr.
Data is right in that Paul doeshave small cap blend in several
of his recommended portfolios,specifically his four-fund US
(20:00):
variant and ultimate buy andhold portfolios.
Now Paul labels this small capblend not growth, so perhaps
that skews far enough away fromthe hideous growth factor for
small caps that it becomespalatable?
In their best in classrecommendations, they choose
AVSC for this class, which inMorningstar falls right into the
value column.
Interestingly enough, if youlook at AVUV, it falls right
(20:23):
into the same box onMorningstar.
This leads me to anotherquestion.
What is with Avantis and thesevalue slash equity paired funds,
e.g.
AVUV slash AVSV or AVLV slashAVLC, that almost fall on top of
each other factor-wise.
Are these pairings differentenough to be worth rebalancing
between?
(20:44):
I forgot to mention this in thefirst email, but perhaps the
source of confusion is thesimilar seeming terms of blend
in PAL's funds that look likethey're being used where one
would place growth funds, aswell as Avances' use of equity
for its more growth y but stillapparently value ETFs.
Best, Patrick.
Voices (21:13):
All I know is Mr.
Krabs said Patrick, don't dothat! Cheesy.
Mostly Uncle Frank (21:23):
Well, Patrick, you might have the
wrong podcast for answeringthese questions because I am not
responsible for how PaulMerriman rates his funds or
classifies them.
I would use the classificationsyou see at Morningstar for
comparison purposes between twofunds.
And to me, if it's in the smallcap value box there, it's a
(21:43):
small cap value fund.
If it's in the large cap valuebox, like SCHD we just talked
about, it's a large cap valuefund.
And so honestly, I only takethe names of funds with a grain
of salt, because what they areentitled and what they actually
do or how they actually performor should be classified can be
two different things.
(22:04):
And you just have to do yourhomework.
Now, if you listen to a lot ofwhat Paul Merriman says or read
a lot of what he says, he willtell you eventually that the
small cap growth category of allthose style boxes has
relatively high performance, butalso has relatively high
volatility and so is not a goodperformer overall compared to
(22:28):
say small cap value or large capblend.
If you look at his portfolios,they are all structured as
essentially half blend, whichsometimes is growth y like it is
now, and is sometimes morevalue tilted, which happens
basically when the stock marketcrashes, the blend funds will go
(22:48):
from the growth side to thevalue side, because the growth
stocks in them will tend tocrash and they will acquire more
value characteristics.
So that being said, what hisfoundation is based on is having
half blend and half value.
So basically he ends up withvalue-tilted portfolios, and
(23:10):
that carries through to like allof the other asset classes,
whether they're international,US, or something else.
If you look at his 10 fundportfolio and his four-fund
portfolios and his two fundportfolios, they all have this
same basic characteristic thathalf of it is in a blend fund
and half of it is in a valuefund.
But I think you need toappreciate the difference
(23:31):
between what he's trying to doand what we're trying to do
here.
What he is trying to do is comeup with portfolios that
outperform in terms of long-termreturns and outperform the
regular total market funds.
That's what he's trying to do.
We're not trying to do thathere.
(23:52):
This is something that peoplehave difficulty appreciating
that the goal of creating aportfolio with a higher safe
withdrawal rate and the goalwith creating a portfolio that
has the highest long-term returnare two different goals.
They're two different goals.
They're related and there'soverlap.
(24:14):
But what we are doing alsoaccounts for volatility in the
portfolio and accounts for thefact that you're taking money
out of it.
And when you are accounting forthose factors, you get to
slightly different results.
And so why we care about havingvalue in the portfolio is not
because we think small cap valueis going to outperform the rest
(24:35):
of the market.
I don't think that.
And I don't care.
I would assume that it wouldperform similarly to the rest of
the market.
And get this (24:42):
if small cap value is not outperforming the
rest of the market, thensomething else has to be
performing better.
And that something else isprobably going to be the thing
that's the most different.
It's probably going to besomething like large cap growth.
Voices (24:56):
That was weird, wild stuff.
I did not know that.
Mostly Uncle Frank (25:00):
So what we really care about here is
slicing up the stock portion ofthe portfolio such that you have
holdings that are performingdifferently at different times.
And the easiest way to do thatis to separate growth from
value.
And if you just want to do itwith two funds, the easiest way
to do that is to have a largecap growth fund or something
(25:22):
similar to it, such as a largecap total market fund, and then
pair that with a small cap valuefund.
But you can use all kinds ofother different kinds of value
if you'd like.
And what you are preparing forwhen you're doing that is for
years like 2001 to 2003 andyears like 2022, when the stock
(25:43):
market is going down andperforming badly, usually growth
is doing a whole lot worse thanvalue, like 20% worse or more.
If you know that, you know thatthere's a rebalancing
opportunity in that.
That when growth really crashesa lot, you're able to sell some
value and sell some otherthings in the portfolio and then
(26:04):
buy more of the growth stockswhen they're low.
You sell high and you buy low.
Voices (26:09):
Think big, think positive, never show any sign of
weakness, always go for thethrone.
Buy low, sell high.
Fear, that's the other guy'sproblem.
Mostly Uncle Frank (26:18):
That's the purpose of rebalancing.
That is an application of whatis called Shannon's Demon, which
is a mathematical concept andwhy you get a performance bonus
out of diversification if it'saccompanied by rebalancing.
Voices (26:35):
Yeah, baby, yeah.
Mostly Uncle Frank (26:38):
And that's what we're doing here.
Voices (26:40):
This is how we do it.
Mostly Uncle Frank (26:48):
Now, Paul Merriman's not trying to do
that.
He's trying to find things thatactually outperform the rest of
the market.
And if you look at the actualstrategy he's adopted for
drawing down on, it's simply tounderspend the portfolio.
If you listen to his interviewsand descriptions, he elected to
work until age 70 so that hewould have essentially twice as
(27:09):
much money as he needed forretirement.
And that is a very commonstrategy for people in
traditional personal finance.
They're over savers.
And if you do that and thenjust have a really low
withdrawal rate, that's 3% orless, you don't have a problem.
I mean you're gonna end up witha whole lot of money at death
if you don't find a way to giveit away before then.
Voices (27:30):
Death stocks you at every turn.
Grandpa?
Well it does.
Mostly Uncle Frank (27:36):
But that is one way to solve the retirement
problem is to work longer thanyou actually need to and save a
whole lot more money than youactually need.
And that works.
Now that's not my choice.
Instead of retiring at 70 likehe did, I chose to retire at 55
and have a portfolio that allowsme to spend more money.
So I have those extra fifteenyears.
(27:57):
I thought having the extrafifteen years of retirement was
more important than oversavingand underspending later in life.
You may disagree.
But that's a choice we all haveto make, and we all do make
whether we acknowledge we'redoing it or not.
Voices (28:18):
Oh, where were we?
Mostly Uncle Frank (28:22):
For more on this, go back and listen to
episode 401 of this podcast,which goes into more detail
about the difference betweenpeople who are trying to
maximize returns and people whoare trying to maximize a safe
withdrawal rate.
Voices (28:40):
Nothing you have ever experienced can prepare you for
the unbridled carnage you'reabout to witness.
Super vulnerable, the world'sscary, they don't know what
pressure is.
In this building, it's eitherkill or be killed.
You make no friends in the pitsand you take no prisoners.
One minute you're up half amillion and soybeans in the next
boom.
Your kids don't go to collegeand they've repossessed your
bent.
Are you with me?
Mostly Uncle Frank (28:57):
Because these are very interesting
philosophical questions, butthey're also interesting
financial questions becausepersonal finance is finance
first.
That's your financial behaviorsshould match your financial
goals.
And your financial behaviorsalso imply certain goals.
That's what economists call arevealed preference.
(29:25):
So you might want to make sureyou're choosing the financial
goal first and then adapting thebehavior to that, as opposing
to picking a financial behaviorthat sounds comfortable or
convenient, which may notactually match a goal you
actually have.
Something for you to ponder.
Voices (29:43):
Is the coma painful?
Oh heck no! You relive longlost summers.
Kiss girls from high school.
It's like one of those TV showswhere they show a bunch of
clips from old episodes.
Mostly Uncle Frank (29:58):
I'm sorry, I don't know all the And outs of
how Avantis structures its fundsor how Paul Merriman chooses to
label them.
But hopefully that helps some.
And thank you for your email.
Speaker 14 (30:11):
Aren't you Patrick Star?
Yep.
And this is your ID.
Yep.
I found this ID in this wallet.
And if that's the case, thismust be your wallet.
That makes sense to me.
Then take it.
It's not my wallet.
Can you take hats in adignified and sophisticated
(30:31):
manner?
Voices (30:32):
You mean like a weenie?
Okay.
May I take your hat?
May I take your hat?
May I take Alright, I've heardenough.
You've got the job.
Last off.
Mostly Uncle Frank (30:46):
Last off?
We have an email from Shushi.
Mostly Queen Mary (30:50):
No way.
Mostly Uncle Frank (30:51):
And Shushi writes?
Mostly Queen Mary (30:53):
Hello, Frank.
First, thank you for sharingyour work and passion.
It was a significant influencefor me as I worked on my Fi
plan.
I reached Fi recently and nowgoing through the reality of
being in drawdown mode.
While I've read informationfrom a lot of people that
contribute to the Fi community,yours in particular was
extremely valuable as I thinkabout the drawdown stage.
(31:15):
There is one question I can'tfind any good information on
though, and I hope this emailcatches your attention amongst
many others that I'm sure youreceive.
My question is, once I'mdrawing down, how do I keep an
eye on when it might benecessary to make a change to my
plan, hopefully temporarily?
The Monte Carlo simulations andstress testing against
(31:35):
historical performance are greatat percentage of success, etc.,
but obviously there is always achance, however small, of the
plan trending toward a negativedirection.
I've in the past figured that Icould keep a copy of the
simulation output with portfoliovalues for the 10%, 75%, and
90% probabilities, and track myactuals against that to see if
(31:57):
that is happening and make anadjustment accordingly.
And Bill Bangin's book proposedsomething along those lines as
well, tracking actual versusprojected withdrawal rate.
I like the idea of this as arate because while I understand
starting the withdrawal rate andadjusting for inflation annual,
I'm nervous how to think aboutportfolio value for a given year
(32:18):
before just blindly withdrawingwhat the number is.
The part I'm confused aboutthough is that MC and other
analyses typically don't accountfor the fact that we already
know that stock valuations rightnow seem high.
Should those analyses beadjusted based on that?
Or it doesn't matter.
And is what I'm thinking a goodapproach, or is there a simpler
solution?
Thank you, Sushi.
Voices (32:53):
That was a shot.
A puff of smoke.
We ran like the chicken.
And that's how we got here.
Wow.
Yeah, well, something likethat.
Mostly Uncle Frank (33:04):
The simplest solution to making
unanticipated adjustments inyour retirement plan is simply
to spend less money.
And you can actually cut yourspending, or you can cut your
personal inflation rate andcommit to not inflating the
amount of money you're spendingfor a year or a series of years.
That is the simplest way to go,and that is in fact the way
(33:26):
most people actually approachthis in real life.
Now you can formalize that byusing things like guardrails, a
guite and clinger kind ofstrategy.
I will link to the portfoliocharts retirement spending
calculator in the show notes,which also describes a set of
(33:48):
different guardrails kind ofstrategies and allows you to
play with those sorts of thingsif you want to see how they play
out.
But Morningstar has found thatsuch strategies tend to add
about 1% or more to a safewithdrawal rate, depending on
how you implement them.
I think the foregoing inflationadjustment strategy is the
easier one to implement, andthat can add between about 0.5
(34:12):
and slightly over 1% to aneffective safe withdrawal rate.
And that is also in line withwhat people actually do, that
they tend to spend less money asthey go through retirement.
I can tell you that our nominalspending has dropped since we
retired, and it's mostly due tolower tax bills and getting all
of the children off the payroll.
And I anticipate further dropsin our spending future.
(34:34):
We at some point are going todownsize this large house we
live in.
We currently support my parentsand they are not going to live
forever.
So chances are that is youreasiest solution, particularly
if you devised a plan like wedid to anticipate some level of
inflation when we're actuallyexperiencing deflation.
Now you asked, when might it benecessary to make a change in
(34:57):
your plan?
Well, I would be looking tothings like are you getting a
result that historically hasnever happened before?
And if you have, you know, astandard kind of two or three
fund portfolio, you would expecta portfolio like that to have
40% drawdowns.
So that would be normal forthat kind of portfolio.
If you're holding the kind ofportfolio that we have around
(35:20):
here, like a golden butterfly ora simple golden ratio
portfolio, you expect to havedrawdowns of more like max of
20%, in which case if you had a30% drawdown, you would probably
take some action, at least ifthat happened in a single year.
But this is why one of myfavorite calculators to look at
on portfolio charts is what theycall the drawdowns calculator,
(35:42):
which shows you over the entiredata set what is the maximum
drawdown, both in terms of depthand in terms of length.
And if you know that, justthat, you can compare portfolios
on their safe withdrawal rate,because the ones with the
shallower drawdowns and shorterdrawdowns have higher safe
withdrawal rates than the oneswith deep drawdowns or long
drawdowns.
Voices (36:03):
Shirley, you can't be serious.
I am serious, and don't call meShirley.
Mostly Uncle Frank (36:08):
Which makes a lot of sense when you think
about it.
So if my current portfolio hadsome kind of a drawdown that was
like 30% plus, and I thought itwas going to last more than
three or four years, that wouldbe outside my expectations, and
so I probably would take someaction on reducing spending in
some way.
It's probably what I'd woulddo.
(36:28):
But in order to know that, youdo need to know something about
the history of what you'reholding.
And as odd as it seems, I see alot of people who never go look
at the actual history of whatthey're holding.
And uh I'll go ahead and makesure you get another copy of
that memo.
Okay.
Instead, they look at crystalballs or guesses or tell stories
(36:49):
about why what they're holdingis not going to have a huge
drawdown anymore.
And that's really not a goodapproach.
Voices (36:55):
Now you can also use the ball to connect to the spirit
world.
Mostly Uncle Frank (36:59):
So if you don't know what the deepest
drawdown and longest drawdown isfor whatever retirement
portfolio you're holding, youjust haven't done enough
homework.
You need to go figure that out.
It's not that hard, but a lotof people just never do it.
Voices (37:12):
I've officially amounted to check you squat.
Mostly Uncle Frank (37:18):
Now you could also do some of the other
things you suggest, like runninga Monte Carlo simulation every
year.
But honestly, you really don'twant to have this planning or
these planning kind of rulesdictate the way you live your
life and your actual spending.
It's one thing if you are justreducing some excessive
(37:40):
discretionary spending based onsome newly updated Monte Carlo
simulation or whatever.
But it's another thing ifyou're cutting into things that
are actually important to you.
So be careful that you're notcoming up with some plan that is
so mathematically rigid itcauses you to not live your best
life, essentially.
Voices (38:00):
That's not an improvement.
Mostly Uncle Frank (38:02):
After that, I would say run whatever tests
make you feel comfortable.
Because some people just liketo run lots of tests and it
makes them feel morecomfortable.
Voices (38:13):
As you can see, all communication is shut off.
In spite of our mechanicalmagnificence, if it were not for
this continuous stream of motorimpulses, we would collapse
like a bunch of broccoli.
(38:34):
In conclusion, it should benoted.
Give him an extra dollar.
An extra dollar, yes, sir.
That any more than commoninjury to the nerve roots is
always serious.
Mostly Uncle Frank (38:52):
Just make sure you are not injecting
unrealistic assumptions into anyof these tests that you're
running.
Because that's the biggestproblem with calculators, is
people not using base rateassumptions but making up other
things.
Voices (39:07):
Fat, drunk, and stupid is no way to go through
lifestyle.
Mostly Uncle Frank (39:10):
And then the final question you had had to
do with stock valuations beinghigh right now and whether our
calculations should be adjustedbased on that.
And the answer is no, at leastnot just based on that.
If you do read a lot of BillBangin's book and then his
follow-up research, he's beenunable to attach a forecasting
(39:32):
mechanism strictly to valuationmetrics.
When he added inflation, thatseemed to be a more important
metric to be adjusting safewithdrawal rates on.
And the thing you need tounderstand is that he wasn't
adjusting them down for highvaluations or high inflation.
He was adjusting them upwardfor low valuations and lower
(39:55):
inflation or normal inflationbecause the worst case scenario
happens to be the inflationaryscenario of the late 1960s and
1970s.
The way we really deal with thealleged threat of high
valuations in one of these kindof portfolios is
diversification.
We're not just holding a largecap total market fund or SP 500
(40:19):
fund or that combined with atotal international fund.
That is not adequatediversification if you want to
have a high safe withdrawalrate.
The way we solve that is bytilting or having value-tilted
funds in the portfolio partiallyon the stock side of things,
because that automaticallyreduces the valuation of your
(40:41):
portfolio.
Your portfolio.
You don't have to have aportfolio that has the same
valuation metrics as the totalmarket portfolio.
And you shouldn't want thatkind of thing if you are drawing
down on it.
What you want is something witha lower valuation to begin
with, and you can create that byadding value-tilted funds to
your portfolio, which is notthat hard.
(41:03):
The other way you get aroundthis is by having other assets
that are not stocks in yourportfolio, including not only
treasury bonds but alternatives.
So to the extent highvaluations are an alleged
problem, that is how we solvethe problem with a better
portfolio.
Not by not spending money orgoing into fear-mongering or
(41:24):
trying to predict things usingcape ratios.
Voices (41:27):
Now the crystal ball has been used since ancient times.
It's used for scrying, healing,and meditation.
Mostly Uncle Frank (41:36):
Because people who have tried to predict
things using valuation ratioshave been wrong over and over
again, especially in the pastfifteen years or so.
Voices (41:46):
This is the one that I tend to use more often.
I have a calcite ball and Ihave a black obsidian one here.
A really big one here, which ishuge.
Mostly Uncle Frank (42:01):
And the only question is why.
I will link to a nice shortarticle by Michael Batnick,
which explains that.
But the answer is it's probablynot a problem, and if it is a
problem, you solve it withdiversification, not with not
spending money.
Hopefully all that helps.
And thank you for your email.
(42:21):
But now I see our signal isbeginning to fade.
If you have comments orquestions for me, please send
them to Frank atRiskParodyRadio.com.
That email is Frank atRiskParodyRadio.com.
(42:42):
Or you can go to the website,www.riskparodyradio.com.
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 with me some
stars, a follow, a review.
That would be great.
Okay.
Thank you once again for tuningin.
(43:03):
This is Frank Vasquez with RiskParty Radio.
Signing off.
A foolish consistency is the hobgoblin of little mind,
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 Queen Mary (00:18):
And now, coming to you from Dead Center
on your dial, welcome to RiskParity Radio, where we explore
alternatives and assetallocations for the
do-it-yourself investor.
Broadcasting to you now fromthe 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 have just stumbled inhere, you will find that this
podcast is kind of like a divebar of personal finance and
do-it-yourself investing.
Voices (00:52):
Expect the unexpected.
Mostly Uncle Frank (00:55):
There are basically two kinds of people
that like to hang out in thislittle dive bar.
Voices (01:00):
You see, in this world, there's two kinds of people, my
friend.
Mostly Uncle Frank (01:04):
The smaller group are those who actually
think the host is funny,regardless of the content of the
podcast.
Voices (01:12):
Funny how?
How am I funny?
Mostly Uncle Frank (01:14):
These include friends and family and a
number of people named Abby.
Voices (01:20):
Abby someone.
Mostly Uncle Frank (01:22):
Abby who?
Voices (01:23):
Abby Normal.
Abby Normal.
Mostly Uncle Frank (01:29):
The larger group includes a number of
highly successful do-it-yourselfinvestors, many of whom have
accumulated multimillion dollarportfolios over a period of
years.
Voices (01:42):
The best, Jerry.
The best.
Mostly Uncle Frank (01:45):
And they are here to share information and
to gather information to helpthem continue managing their
portfolios as they go forward,particularly as they get to
their distribution ordecumulation phases of their
financial life.
Voices (02:04):
What we do is if we need that extra push over the cliff,
you know what we do?
Put it up to a nevin, exactly.
Mostly Uncle Frank (02:11):
But whomever you are, you are welcome here.
But now onward, episode 461.
Today's party radio, we're justgoing to do what we do best
here.
Which means we're going toanswer your emails.
Voices (02:32):
I could have told you that.
Mostly Uncle Frank (02:34):
And so without further ado.
Voices (02:36):
Here I go once again with the email.
Mostly Uncle Frank (02:40):
And first off.
First off, we have an emailfrom Tyson.
Voices (02:47):
Like you have my favorite quote that everybody
has a plan.
Sometimes they punch you backin the face.
Yeah, I have a plan too, yougotta be careful with that.
Mostly Uncle Frank (02:59):
And Tyson writes.
Mostly Queen Mary (03:01):
Hi Frank, I hope you're doing well.
I just wanted to thank you forthe great podcast I recently saw
on Bigger Pocket's Money.
Voices (03:08):
Shall we?
Mostly Queen Mary (03:10):
It was extremely knowledgeable and
insightful, and I reallyappreciated how clearly you
explained the concepts.
One, you mentioned that weshould shift to the recommended
allocation once we're at 80% ofour fire number.
My question is, at that 80%point, do you simply adjust the
(03:34):
allocation and let it ride untilyou reach your full fire number
before starting withdrawals?
Or do you actually begin thewithdrawals at that 80% point?
For example, if my fire numberis $5 million and I change the
allocation at $4.5 million,should I let it grow to $5
million before withdrawing orstart withdrawals right at $4.5
(03:57):
million?
2.
In your model you allocate aportion of gold.
Given that Bitcoin is oftenreferred to as digital gold, and
it has performed very well forme over the past six to seven
years, do you think it could bea reasonable substitute for gold
in this strategy, especiallyfor millennials?
That's not how it works.
That's not how any of thisworks.
(04:19):
Or do you suggest sticking withtraditional gold for the sake
of stability?
Voices (04:24):
Yes!
Mostly Queen Mary (04:25):
Three, for the stock portion, you suggested
splitting it half value andhalf growth.
For the value half, would it bereasonable to use SCHD instead
of the specific ETFs or fundsyou mentioned in the podcast?
Four, is this portfoliodesigned to last for 30 years or
for life?
And it's gone.
(04:46):
I'm currently 40 years old andexpect to reach my fire number
in about two years.
Since I don't plan on dying anytime soon, I'd like to be
reassured that this portfoliocould sustain me for the rest of
my life, not just threedecades.
Thank you again for sharingyour expertise.
Your breakdown of theseconcepts has been incredibly
(05:08):
helpful, and I look forward tohearing your thoughts.
Best regards, Tyson.
Mostly Uncle Frank (05:14):
Well, hello, Tyson.
Voices (05:16):
One question.
How do you come up with thesaying everyone has a game plan
until they get punched in theface?
It's iconic.
Well, that's what it happened.
Everybody had a game plan untilthey get punched in the face.
Then they gotta go to plan two.
Punch the other guy.
Mostly Uncle Frank (05:30):
I'm glad you enjoyed my appearances on
Bigger Pockets Money.
They were two from last July.
One where I explained thebasics of risk parity style
investing, particularly forretirement portfolios, and then
one where we constructed anactual portfolio that Mindy
Jensen now holds.
I will link to both of those inthe show notes there on
(05:51):
YouTube, as well as podcastproviders, but you can actually
see us on YouTube.
But let's get into yourquestions.
The first one was about theretirement point versus the
transition point.
And the basic recommendationthat I've made and others have
(06:11):
kind of agreed with is that youprobably want to start
transitioning your accumulationportfolio to a retirement
portfolio a few years before youactually enter into retirement
and start living off theportfolio.
And that's the key factor isare you taking money out of this
or putting money into it?
So a good kind of ballparkestimate is if you are about 80%
(06:32):
to the portfolio size that youthink you need, your fire
number, and are a few years out,say five years out, you can
make that transition and thenjust let your portfolio continue
to grow until it reaches thenumber.
So no, you're not taking moneyout of it right away.
The purpose of doing it beforeyou actually retire is simply to
(06:55):
avoid a bad sequence of returnsrisk, because if you're holding
something like a hundredpercent stock portfolio all the
way up to retirement, there's apossibility that two years
before your retirement we havethe year 2000 to 2003 or 2008,
in which case, all of a suddenyou don't have enough to retire.
In fact, you may only have 60%of what you had before.
(07:16):
And so the only way to getaround that, I shouldn't say the
only way, but the mostefficacious way to get around
that is simply to make thetransition at some point earlier
in time.
And the only question is, howearly do you think you need to
be?
The way this works in real lifeis kind of interesting because
almost nobody actually picks onenumber and retires when they
(07:37):
get to exactly that number.
What typically happens is thatpeople have a phi number in mind
and will end up exceeding itbecause they don't want to quit
working.
They're not ready to quitworking, or there's some other
things going on, maybe theirportfolio is growing more than
they expected.
Many other conditions could beaffecting this.
(07:59):
So oftentimes people get to apoint where they're saying 80%
to a Phi number with part oftheir portfolio and can convert
that part of the portfolio, andthen they continue to go on and
accumulate more assets.
And what you do with that moreassets is completely flexible.
I mean, you could invest itaggressively and take your
(08:21):
chances with it because youdon't need it to rely on it, or
maybe you just stick it away incash because you're planning on
taking a big trip or having somelarge expense that you want to
spend extra money on.
So you may have a period intime where you are neither
adding to nor subtracting from aretirement portfolio.
(08:43):
That situation is also modeledby the concept of Coast Fi,
where you accumulate some amountof money early on and then just
put it aside and let it grow,knowing that eventually that
will grow into your Phi number,your retirement number that you
need.
And then in the meantime, youcan go off and just earn money
(09:03):
and spend it and not be worriedabout accumulating anything
anymore.
So there are going to be manydifferent approaches here in
reality, depending on yourparticular circumstances.
The only problem we're tryingto solve with a conversion
sometime before you actually getto financial independence is to
make sure you don't have thatcrash right before you plan to
(09:24):
retire.
That ruins your possibility ofretiring on a date that you had
selected in the past.
Because if you're young enoughand you have a choice, you can
always just keep working in theworst case scenario with that.
If you're older, you may nothave that choice.
And that is actually whatcauses most people to retire is
they are retired by theiremployer or by some other
(09:45):
circumstances.
Now, your second question iswhether you could allocate
towards Bitcoin instead of goldin a portfolio like this.
And the answer is no, at leastnot right now.
Voices (09:57):
Not gonna do it.
Wouldn't be prudent at thisjuncture.
Mostly Uncle Frank (10:01):
Gold has a couple of unique properties that
are unique to gold and do notapply to Bitcoin or just about
any other non-financial asset.
And that is gold is part of theplumbing, if you will, of the
international economic system.
And in particular, it is anasset that is held by central
(10:21):
banks around the world as abackup asset.
So a lot of the demand forgold, particularly these days,
comes from central banks buyinggold as a backup or reserve
asset.
Bitcoin doesn't fulfill thatrole, and really nothing else
does.
That's not a currency or atreasury bond or something like
that.
There's actually a set ofinternational banking
(10:44):
regulations that apply to this,and they're called the Basel
Regulations after the city inSwitzerland, and they're up to
what they call Basel III now.
And under the Basel IIIregulations, gold is a tier one
asset, which means it can beused as a primary reserve asset
by not only central banks, butalso commercial banks in terms
(11:06):
of their regulatoryrequirements.
And that does not apply tosomething like Bitcoin, which is
purely a speculative asset andis driven by private demand in
particular.
One of the problems with itright now is it still seems to
be highly correlated to otherrisk assets, especially
technology-related stocks.
(11:27):
And it does not make a verygood diversifier if it's
correlated with stocks.
Because the point of using analternative asset in one of
these kind of portfolios is thatit has essentially zero
correlation with both stocks andbonds.
That is the kind of alternativeasset you're looking for.
And at least right now, Bitcoindoes not fulfill that
requirement.
Maybe it will in the future,but maybe it won't.
(11:49):
We don't know.
Speaker 14 (11:51):
We don't know.
What do we know?
You don't know, I don't know,nobody knows.
Mostly Uncle Frank (11:57):
So you would not use it as a substitute for
gold in one of these kind ofportfolios.
Voices (12:02):
Forget about it.
Mostly Uncle Frank (12:04):
And we do have an episode about the
potential use of Bitcoin in oneof these kind of portfolios.
It's episode 29, and you willfind it along with all of the
other investment specificrelated episodes on the episode
guide page at the website atwww.riskperdireater.com.
Voices (12:22):
That is the straight stuff, oh funkmaster.
Mostly Uncle Frank (12:25):
It's interesting, at that point in
time it had a volatility thatwas about 10 times that of the
stock market.
It seems to have a volatilityof about three times the NASDAQ
right now, which is important ifyou are considering using it
for sizing.
Right now, it performs like alevered NASDAQ fund.
(12:46):
But these characteristics seemto be changing as this asset
evolves and as it becomes moreaccepted by the large players in
the financial services industrythat now have put out all these
ETFs and things.
But it still would only be usedas an add-on asset and perhaps
a source of leverage in someways.
At least right now.
(13:06):
Alright, your third questionwas whether you could use SCHD
as part of the value allocationin one of these kinds of
portfolios.
And the answer is yes, you can.
That's a good large cap valuefund to use.
It's relatively inexpensive.
And sits way over there on thevalue scale.
(13:27):
And that's the way I tend tolook at funds.
I will run them through theanalyzer there at Morningstar,
which tells you all about them,including where they fall in
terms of growth and value andsize.
The one thing you should knowabout large cap value in
particular is it that it tendsto have both lower volatility
and lower overall returns thanthe rest of the stock market.
(13:48):
Mostly because it's verypredictable or relatively
predictable compared to, say,growth stocks or smaller stocks,
and therefore the market does avery good job at pricing it
accurately.
Voices (14:01):
That's the fact, Jack!
Mostly Uncle Frank (14:03):
So it has traditionally been like a core
holding of designed retirementportfolios, say like the
Vanguard Wellington Fund orVanguard Wellesley Fund, will
have a tilt towards large capvalue.
And if you are modeling in invarious calculators that are
modeling by asset class, youwould model that as large cap
(14:23):
value and would not expect it tooutperform the asset class
generally.
And your last question waswhether these portfolios are
designed to last for 30 years orfor life.
And the answer is the latter.
This business about 30 years,it's a litmus test for me.
Because somebody who does notreally understand how the safe
(14:45):
withdrawal rate works thinks 30years is an important metric.
Am I right or am I right or amI right?
Right, right, right.
All 30 years is, is just youhave to pick some time frame so
that you can compare oneportfolio to another.
But you could have picked 20years, you could have picked 40
years, you could have picked 50years.
(15:06):
Now, as it happens, and we knowthis from both from Bill
Bangin's original research andfrom the current research and
from all of the charts atportfolio charts and elsewhere
where you can look this up, isthat this function is
asymptotic.
So that means as it goes out,the safe withdrawal rate
function to 45, 50, 60 years, itdoes not keep going down.
(15:30):
It flattens out.
And essentially, to go from 30years to forever, you would
subtract about 0.6 from the30-year safe withdrawal rate.
And you can see this in BillBangin's book, or you can just
go to the portfolio charts siteand look up a portfolio, say the
(15:50):
golden ratio portfolio, it'llsay if you do a 30-year
retirement, it has a safewithdrawal rate of 6.1 since
1970, and you go out to 45 yearsand it says 5.4.
So subtract 0.6 or 0.7 if youprefer.
The truth is you get that backthough.
And the way you get that backis that if you are assuming you
(16:13):
are an average retiree, then youshould not be assuming that you
are going to experienceinflation at the rate of the
CPI.
You are going to experienceinflation at the rate of CPI
minus 1% to CPI minus 2%.
That is not the standardassumption.
But if you make the accurateassumption that you are going to
(16:34):
be a typical retiree or be ableto organize your finances in
such a way that you can be atypical retiree, then you should
be using CPI minus 1 to CPIminus 2.
If you do that, it has theeffect of increasing the safe
withdrawal rate by between 0.5and 1%.
So what that means is that foryou, for a retirement that's
(16:59):
going to last, say, 50 or 60years, and you are an average
retiree, that 30-year estimateturns out to be much more
accurate than a long-termestimate that adds CPI
inflation.
Because you subtract the 0.6 or0.7, and then you add back
somewhere between 0.5 and 1.
And guess what?
You get back to that 30-yearestimate using the CPI rate of
(17:22):
inflation.
Voices (17:23):
Did you get that memo?
Mostly Uncle Frank (17:25):
So it's mathematical happenstance, but
that 30-year estimate using CPIinflation is actually a fairly
good estimate for forever usingactual inflation.
Speaker 14 (17:39):
Yeah.
Didn't you get that memo?
Mostly Uncle Frank (17:43):
The bottom line is your portfolio does not
turn into a pumpkin after 30years.
It just doesn't.
That's not the way this works.
(18:08):
That's not the way it's everworked.
If you run into people sayingit only works for 30 years, the
answer is they are wrong andthey don't understand how the
calculation works.
So they're either ignorant orfear-mongering.
Or maybe both.
Or stop using that as a basisto sell their services or lower
(18:55):
the bar for what they are doing.
Voices (18:58):
Because only one thing counts in this life.
Get them to sign on the linewhich is dotted.
Mostly Uncle Frank (19:04):
So, hopefully, those answers help.
I'm glad you're enjoying thepodcast.
And thank you for your email.
Voices (19:22):
Second off.
Mostly Uncle Frank (19:23):
Second off, we have an email from Patrick.
Voices (19:28):
I got you though, SpongeBob!
Mostly Uncle Frank (19:34):
And Patrick Wright's.
Mostly Queen Mary (19:36):
Hi, Frank.
I just heard episode 412, andin the third question from Mr.
Data, he asked why PaulMerriman is a small cap growth
fund, wherein you told him hemust have confused himself as
Paul is a big small cap valueguy.
However, Mr.
Data is right in that Paul doeshave small cap blend in several
of his recommended portfolios,specifically his four-fund US
(20:00):
variant and ultimate buy andhold portfolios.
Now Paul labels this small capblend not growth, so perhaps
that skews far enough away fromthe hideous growth factor for
small caps that it becomespalatable?
In their best in classrecommendations, they choose
AVSC for this class, which inMorningstar falls right into the
value column.
Interestingly enough, if youlook at AVUV, it falls right
(20:23):
into the same box onMorningstar.
This leads me to anotherquestion.
What is with Avantis and thesevalue slash equity paired funds,
e.g.
AVUV slash AVSV or AVLV slashAVLC, that almost fall on top of
each other factor-wise.
Are these pairings differentenough to be worth rebalancing
between?
(20:44):
I forgot to mention this in thefirst email, but perhaps the
source of confusion is thesimilar seeming terms of blend
in PAL's funds that look likethey're being used where one
would place growth funds, aswell as Avances' use of equity
for its more growth y but stillapparently value ETFs.
Best, Patrick.
Voices (21:13):
All I know is Mr.
Krabs said Patrick, don't dothat! Cheesy.
Mostly Uncle Frank (21:23):
Well, Patrick, you might have the
wrong podcast for answeringthese questions because I am not
responsible for how PaulMerriman rates his funds or
classifies them.
I would use the classificationsyou see at Morningstar for
comparison purposes between twofunds.
And to me, if it's in the smallcap value box there, it's a
(21:43):
small cap value fund.
If it's in the large cap valuebox, like SCHD we just talked
about, it's a large cap valuefund.
And so honestly, I only takethe names of funds with a grain
of salt, because what they areentitled and what they actually
do or how they actually performor should be classified can be
two different things.
(22:04):
And you just have to do yourhomework.
Now, if you listen to a lot ofwhat Paul Merriman says or read
a lot of what he says, he willtell you eventually that the
small cap growth category of allthose style boxes has
relatively high performance, butalso has relatively high
volatility and so is not a goodperformer overall compared to
(22:28):
say small cap value or large capblend.
If you look at his portfolios,they are all structured as
essentially half blend, whichsometimes is growth y like it is
now, and is sometimes morevalue tilted, which happens
basically when the stock marketcrashes, the blend funds will go
(22:48):
from the growth side to thevalue side, because the growth
stocks in them will tend tocrash and they will acquire more
value characteristics.
So that being said, what hisfoundation is based on is having
half blend and half value.
So basically he ends up withvalue-tilted portfolios, and
(23:10):
that carries through to like allof the other asset classes,
whether they're international,US, or something else.
If you look at his 10 fundportfolio and his four-fund
portfolios and his two fundportfolios, they all have this
same basic characteristic thathalf of it is in a blend fund
and half of it is in a valuefund.
But I think you need toappreciate the difference
(23:31):
between what he's trying to doand what we're trying to do
here.
What he is trying to do is comeup with portfolios that
outperform in terms of long-termreturns and outperform the
regular total market funds.
That's what he's trying to do.
We're not trying to do thathere.
(23:52):
This is something that peoplehave difficulty appreciating
that the goal of creating aportfolio with a higher safe
withdrawal rate and the goalwith creating a portfolio that
has the highest long-term returnare two different goals.
They're two different goals.
They're related and there'soverlap.
(24:14):
But what we are doing alsoaccounts for volatility in the
portfolio and accounts for thefact that you're taking money
out of it.
And when you are accounting forthose factors, you get to
slightly different results.
And so why we care about havingvalue in the portfolio is not
because we think small cap valueis going to outperform the rest
(24:35):
of the market.
I don't think that.
And I don't care.
I would assume that it wouldperform similarly to the rest of
the market.
And get this (24:42):
if small cap value is not outperforming the
rest of the market, thensomething else has to be
performing better.
And that something else isprobably going to be the thing
that's the most different.
It's probably going to besomething like large cap growth.
Voices (24:56):
That was weird, wild stuff.
I did not know that.
Mostly Uncle Frank (25:00):
So what we really care about here is
slicing up the stock portion ofthe portfolio such that you have
holdings that are performingdifferently at different times.
And the easiest way to do thatis to separate growth from
value.
And if you just want to do itwith two funds, the easiest way
to do that is to have a largecap growth fund or something
(25:22):
similar to it, such as a largecap total market fund, and then
pair that with a small cap valuefund.
But you can use all kinds ofother different kinds of value
if you'd like.
And what you are preparing forwhen you're doing that is for
years like 2001 to 2003 andyears like 2022, when the stock
(25:43):
market is going down andperforming badly, usually growth
is doing a whole lot worse thanvalue, like 20% worse or more.
If you know that, you know thatthere's a rebalancing
opportunity in that.
That when growth really crashesa lot, you're able to sell some
value and sell some otherthings in the portfolio and then
(26:04):
buy more of the growth stockswhen they're low.
You sell high and you buy low.
Voices (26:09):
Think big, think positive, never show any sign of
weakness, always go for thethrone.
Buy low, sell high.
Fear, that's the other guy'sproblem.
Mostly Uncle Frank (26:18):
That's the purpose of rebalancing.
That is an application of whatis called Shannon's Demon, which
is a mathematical concept andwhy you get a performance bonus
out of diversification if it'saccompanied by rebalancing.
Voices (26:35):
Yeah, baby, yeah.
Mostly Uncle Frank (26:38):
And that's what we're doing here.
Voices (26:40):
This is how we do it.
Mostly Uncle Frank (26:48):
Now, Paul Merriman's not trying to do
that.
He's trying to find things thatactually outperform the rest of
the market.
And if you look at the actualstrategy he's adopted for
drawing down on, it's simply tounderspend the portfolio.
If you listen to his interviewsand descriptions, he elected to
work until age 70 so that hewould have essentially twice as
(27:09):
much money as he needed forretirement.
And that is a very commonstrategy for people in
traditional personal finance.
They're over savers.
And if you do that and thenjust have a really low
withdrawal rate, that's 3% orless, you don't have a problem.
I mean you're gonna end up witha whole lot of money at death
if you don't find a way to giveit away before then.
Voices (27:30):
Death stocks you at every turn.
Grandpa?
Well it does.
Mostly Uncle Frank (27:36):
But that is one way to solve the retirement
problem is to work longer thanyou actually need to and save a
whole lot more money than youactually need.
And that works.
Now that's not my choice.
Instead of retiring at 70 likehe did, I chose to retire at 55
and have a portfolio that allowsme to spend more money.
So I have those extra fifteenyears.
(27:57):
I thought having the extrafifteen years of retirement was
more important than oversavingand underspending later in life.
You may disagree.
But that's a choice we all haveto make, and we all do make
whether we acknowledge we'redoing it or not.
Voices (28:18):
Oh, where were we?
Mostly Uncle Frank (28:22):
For more on this, go back and listen to
episode 401 of this podcast,which goes into more detail
about the difference betweenpeople who are trying to
maximize returns and people whoare trying to maximize a safe
withdrawal rate.
Voices (28:40):
Nothing you have ever experienced can prepare you for
the unbridled carnage you'reabout to witness.
Super vulnerable, the world'sscary, they don't know what
pressure is.
In this building, it's eitherkill or be killed.
You make no friends in the pitsand you take no prisoners.
One minute you're up half amillion and soybeans in the next
boom.
Your kids don't go to collegeand they've repossessed your
bent.
Are you with me?
Mostly Uncle Frank (28:57):
Because these are very interesting
philosophical questions, butthey're also interesting
financial questions becausepersonal finance is finance
first.
That's your financial behaviorsshould match your financial
goals.
And your financial behaviorsalso imply certain goals.
That's what economists call arevealed preference.
(29:25):
So you might want to make sureyou're choosing the financial
goal first and then adapting thebehavior to that, as opposing
to picking a financial behaviorthat sounds comfortable or
convenient, which may notactually match a goal you
actually have.
Something for you to ponder.
Voices (29:43):
Is the coma painful?
Oh heck no! You relive longlost summers.
Kiss girls from high school.
It's like one of those TV showswhere they show a bunch of
clips from old episodes.
Mostly Uncle Frank (29:58):
I'm sorry, I don't know all the And outs of
how Avantis structures its fundsor how Paul Merriman chooses to
label them.
But hopefully that helps some.
And thank you for your email.
Speaker 14 (30:11):
Aren't you Patrick Star?
Yep.
And this is your ID.
Yep.
I found this ID in this wallet.
And if that's the case, thismust be your wallet.
That makes sense to me.
Then take it.
It's not my wallet.
Can you take hats in adignified and sophisticated
(30:31):
manner?
Voices (30:32):
You mean like a weenie?
Okay.
May I take your hat?
May I take your hat?
May I take Alright, I've heardenough.
You've got the job.
Last off.
Mostly Uncle Frank (30:46):
Last off?
We have an email from Shushi.
Mostly Queen Mary (30:50):
No way.
Mostly Uncle Frank (30:51):
And Shushi writes?
Mostly Queen Mary (30:53):
Hello, Frank.
First, thank you for sharingyour work and passion.
It was a significant influencefor me as I worked on my Fi
plan.
I reached Fi recently and nowgoing through the reality of
being in drawdown mode.
While I've read informationfrom a lot of people that
contribute to the Fi community,yours in particular was
extremely valuable as I thinkabout the drawdown stage.
(31:15):
There is one question I can'tfind any good information on
though, and I hope this emailcatches your attention amongst
many others that I'm sure youreceive.
My question is, once I'mdrawing down, how do I keep an
eye on when it might benecessary to make a change to my
plan, hopefully temporarily?
The Monte Carlo simulations andstress testing against
(31:35):
historical performance are greatat percentage of success, etc.,
but obviously there is always achance, however small, of the
plan trending toward a negativedirection.
I've in the past figured that Icould keep a copy of the
simulation output with portfoliovalues for the 10%, 75%, and
90% probabilities, and track myactuals against that to see if
(31:57):
that is happening and make anadjustment accordingly.
And Bill Bangin's book proposedsomething along those lines as
well, tracking actual versusprojected withdrawal rate.
I like the idea of this as arate because while I understand
starting the withdrawal rate andadjusting for inflation annual,
I'm nervous how to think aboutportfolio value for a given year
(32:18):
before just blindly withdrawingwhat the number is.
The part I'm confused aboutthough is that MC and other
analyses typically don't accountfor the fact that we already
know that stock valuations rightnow seem high.
Should those analyses beadjusted based on that?
Or it doesn't matter.
And is what I'm thinking a goodapproach, or is there a simpler
solution?
Thank you, Sushi.
Voices (32:53):
That was a shot.
A puff of smoke.
We ran like the chicken.
And that's how we got here.
Wow.
Yeah, well, something likethat.
Mostly Uncle Frank (33:04):
The simplest solution to making
unanticipated adjustments inyour retirement plan is simply
to spend less money.
And you can actually cut yourspending, or you can cut your
personal inflation rate andcommit to not inflating the
amount of money you're spendingfor a year or a series of years.
That is the simplest way to go,and that is in fact the way
(33:26):
most people actually approachthis in real life.
Now you can formalize that byusing things like guardrails, a
guite and clinger kind ofstrategy.
I will link to the portfoliocharts retirement spending
calculator in the show notes,which also describes a set of
(33:48):
different guardrails kind ofstrategies and allows you to
play with those sorts of thingsif you want to see how they play
out.
But Morningstar has found thatsuch strategies tend to add
about 1% or more to a safewithdrawal rate, depending on
how you implement them.
I think the foregoing inflationadjustment strategy is the
easier one to implement, andthat can add between about 0.5
(34:12):
and slightly over 1% to aneffective safe withdrawal rate.
And that is also in line withwhat people actually do, that
they tend to spend less money asthey go through retirement.
I can tell you that our nominalspending has dropped since we
retired, and it's mostly due tolower tax bills and getting all
of the children off the payroll.
And I anticipate further dropsin our spending future.
(34:34):
We at some point are going todownsize this large house we
live in.
We currently support my parentsand they are not going to live
forever.
So chances are that is youreasiest solution, particularly
if you devised a plan like wedid to anticipate some level of
inflation when we're actuallyexperiencing deflation.
Now you asked, when might it benecessary to make a change in
(34:57):
your plan?
Well, I would be looking tothings like are you getting a
result that historically hasnever happened before?
And if you have, you know, astandard kind of two or three
fund portfolio, you would expecta portfolio like that to have
40% drawdowns.
So that would be normal forthat kind of portfolio.
If you're holding the kind ofportfolio that we have around
(35:20):
here, like a golden butterfly ora simple golden ratio
portfolio, you expect to havedrawdowns of more like max of
20%, in which case if you had a30% drawdown, you would probably
take some action, at least ifthat happened in a single year.
But this is why one of myfavorite calculators to look at
on portfolio charts is what theycall the drawdowns calculator,
(35:42):
which shows you over the entiredata set what is the maximum
drawdown, both in terms of depthand in terms of length.
And if you know that, justthat, you can compare portfolios
on their safe withdrawal rate,because the ones with the
shallower drawdowns and shorterdrawdowns have higher safe
withdrawal rates than the oneswith deep drawdowns or long
drawdowns.
Voices (36:03):
Shirley, you can't be serious.
I am serious, and don't call meShirley.
Mostly Uncle Frank (36:08):
Which makes a lot of sense when you think
about it.
So if my current portfolio hadsome kind of a drawdown that was
like 30% plus, and I thought itwas going to last more than
three or four years, that wouldbe outside my expectations, and
so I probably would take someaction on reducing spending in
some way.
It's probably what I'd woulddo.
(36:28):
But in order to know that, youdo need to know something about
the history of what you'reholding.
And as odd as it seems, I see alot of people who never go look
at the actual history of whatthey're holding.
And uh I'll go ahead and makesure you get another copy of
that memo.
Okay.
Instead, they look at crystalballs or guesses or tell stories
(36:49):
about why what they're holdingis not going to have a huge
drawdown anymore.
And that's really not a goodapproach.
Voices (36:55):
Now you can also use the ball to connect to the spirit
world.
Mostly Uncle Frank (36:59):
So if you don't know what the deepest
drawdown and longest drawdown isfor whatever retirement
portfolio you're holding, youjust haven't done enough
homework.
You need to go figure that out.
It's not that hard, but a lotof people just never do it.
Voices (37:12):
I've officially amounted to check you squat.
Mostly Uncle Frank (37:18):
Now you could also do some of the other
things you suggest, like runninga Monte Carlo simulation every
year.
But honestly, you really don'twant to have this planning or
these planning kind of rulesdictate the way you live your
life and your actual spending.
It's one thing if you are justreducing some excessive
(37:40):
discretionary spending based onsome newly updated Monte Carlo
simulation or whatever.
But it's another thing ifyou're cutting into things that
are actually important to you.
So be careful that you're notcoming up with some plan that is
so mathematically rigid itcauses you to not live your best
life, essentially.
Voices (38:00):
That's not an improvement.
Mostly Uncle Frank (38:02):
After that, I would say run whatever tests
make you feel comfortable.
Because some people just liketo run lots of tests and it
makes them feel morecomfortable.
Voices (38:13):
As you can see, all communication is shut off.
In spite of our mechanicalmagnificence, if it were not for
this continuous stream of motorimpulses, we would collapse
like a bunch of broccoli.
(38:34):
In conclusion, it should benoted.
Give him an extra dollar.
An extra dollar, yes, sir.
That any more than commoninjury to the nerve roots is
always serious.
Mostly Uncle Frank (38:52):
Just make sure you are not injecting
unrealistic assumptions into anyof these tests that you're
running.
Because that's the biggestproblem with calculators, is
people not using base rateassumptions but making up other
things.
Voices (39:07):
Fat, drunk, and stupid is no way to go through
lifestyle.
Mostly Uncle Frank (39:10):
And then the final question you had had to
do with stock valuations beinghigh right now and whether our
calculations should be adjustedbased on that.
And the answer is no, at leastnot just based on that.
If you do read a lot of BillBangin's book and then his
follow-up research, he's beenunable to attach a forecasting
(39:32):
mechanism strictly to valuationmetrics.
When he added inflation, thatseemed to be a more important
metric to be adjusting safewithdrawal rates on.
And the thing you need tounderstand is that he wasn't
adjusting them down for highvaluations or high inflation.
He was adjusting them upwardfor low valuations and lower
(39:55):
inflation or normal inflationbecause the worst case scenario
happens to be the inflationaryscenario of the late 1960s and
1970s.
The way we really deal with thealleged threat of high
valuations in one of these kindof portfolios is
diversification.
We're not just holding a largecap total market fund or SP 500
(40:19):
fund or that combined with atotal international fund.
That is not adequatediversification if you want to
have a high safe withdrawalrate.
The way we solve that is bytilting or having value-tilted
funds in the portfolio partiallyon the stock side of things,
because that automaticallyreduces the valuation of your
(40:41):
portfolio.
Your portfolio.
You don't have to have aportfolio that has the same
valuation metrics as the totalmarket portfolio.
And you shouldn't want thatkind of thing if you are drawing
down on it.
What you want is something witha lower valuation to begin
with, and you can create that byadding value-tilted funds to
your portfolio, which is notthat hard.
(41:03):
The other way you get aroundthis is by having other assets
that are not stocks in yourportfolio, including not only
treasury bonds but alternatives.
So to the extent highvaluations are an alleged
problem, that is how we solvethe problem with a better
portfolio.
Not by not spending money orgoing into fear-mongering or
(41:24):
trying to predict things usingcape ratios.
Voices (41:27):
Now the crystal ball has been used since ancient times.
It's used for scrying, healing,and meditation.
Mostly Uncle Frank (41:36):
Because people who have tried to predict
things using valuation ratioshave been wrong over and over
again, especially in the pastfifteen years or so.
Voices (41:46):
This is the one that I tend to use more often.
I have a calcite ball and Ihave a black obsidian one here.
A really big one here, which ishuge.
Mostly Uncle Frank (42:01):
And the only question is why.
I will link to a nice shortarticle by Michael Batnick,
which explains that.
But the answer is it's probablynot a problem, and if it is a
problem, you solve it withdiversification, not with not
spending money.
Hopefully all that helps.
And thank you for your email.
(42:21):
But now I see our signal isbeginning to fade.
If you have comments orquestions for me, please send
them to Frank atRiskParodyRadio.com.
That email is Frank atRiskParodyRadio.com.
(42:42):
Or you can go to the website,www.riskparodyradio.com.
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 with me some
stars, a follow, a review.
That would be great.
Okay.
Thank you once again for tuningin.
(43:03):
This is Frank Vasquez with RiskParty Radio.
Signing off.
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