Risk Parity Radio
Risk Parity Radio is a podcast about investing located at www.riskparityradio.com. RPR explores risk-parity style portfolios comprised of uncorrelated or negatively correlated asset classes -- stocks, selected bonds, gold, managed futures, and other easily accessible fund options for the DIY investor. The goal is to construct portfolios that are robust and can be drawn down on in perpetuity, and to maximize projected Safe Withdrawal Rates regardless of projected overall returns.
Risk Parity Radio
Episode 401: Generous Times, More Cowbell, Choosing Appropriate Retirement Role Models, Short Term Bonds, And Portfolio Reviews As Of February 7, 2025
In this episode we answer emails from Richard, Robert and Jacob. We discuss Richard's generosity and excellent example as a role model, an ill-conceived and biased critique of small cap value allocations, why you probably should not use popular personal finance gurus as retirement role models due to their workaholism and hoarding behaviors, and why having too much cash or very short term bonds in a portfolio is not a good idea.
And THEN we our go through our weekly portfolio reviews of the eight sample portfolios you can find at Portfolios | Risk Parity Radio.
Additional links:
Father McKenna Center Donation Page: Donate - Father McKenna Center
ERN Small Cap Value Article of 2 December 2024: Small-Cap Value Stocks: Diversification or Di-WORSE-fication? - Early Retirement Now
First Merriman Response to SCV Article: The True Story About Small Cap Value
Supplemental Merriman Responses To SCV Article: Why should small cap value make higher returns?
Testfolio Comparison Of IWN vs. IJS vs. VISVX vs. DFSVX vs VFINX Since July 2000: https://testfol.io/analysis?s=gkqbgk7mzka
Shannon's Demon Article Re Math Of Diversification: Unexpected Returns: Shannon's Demon & the Rebalancing Bonus – Portfolio Charts
ERN Safe Withdrawal Rate Post of 15 April 2016: Pros and cons of different withdrawal rate rules - Early Retirement Now
Michael Batnick Article re Shifting In CAPE Ratio: Stocks Are More Expensive Than They Used to Be
Rick Ferri Interview: Show Us Your Portfolio: Rick Ferri | Why a Simple Approach Beats 90% of the Pros
Core 4 Portfolios: Process – Core-4
Rob Berger Interview (with transcript): Bogleheads on Investing with Rob Berger – Episode 48 - The John C. Bogle Center for Financial Literacy
Interview of Michael Kitces Re Problems With TIPS Ladders: Michael Kitces: How Higher Yields Affect Asset Allocation and Retirement Planning | Morningstar
A foolish consistency, is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.
Mostly Uncle Frank:If a man does not keep pace with his companions, perhaps it is because he hears a different drummer.
Mary and Voices:A different drummer and now coming to you from dead center on your dial. Welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor, broadcasting to you now from the comfort of his easy chair. Here is your host, frank Vasquez.
Mostly Uncle Frank:Thank you, Mary, and welcome to Risk Parity Radio. If you have just stumbled in here, you will find that this podcast is kind of like a dive bar of personal finance and do-it-yourself investing.
Voices:Expect the unexpected.
Mostly Uncle Frank:It's a relatively small place. It's just me and Mary in here and we only have a few mismatched bar stools and some easy chairs. We have no sponsors, we have no guests and we have no expansion plans.
Voices:I don't think I'd like another job.
Mostly Uncle Frank:What we do have is a little free library of updated and unconflicted information for do-it-yourself investors.
Voices:Now who's up for a trip to the library?
Mostly Uncle Frank:tomorrow. So please enjoy our mostly cold beer served in cans and our coffee served in old, chipped and cracked mugs, along with what our little free library has to offer.
Voices:Welcome offer.
Mostly Uncle Frank:But now onward, episode 401. Today, on Risk Parity Radio, we will run kicking and screaming away from any artificial intelligences, as we were inundated last time.
Mary and Voices:That's not an improvement.
Mostly Uncle Frank:But what we will be doing is our weekly portfolio reviews of the eight sample portfolios you can find at wwwriskpartyradarcom on the portfolios page.
Voices:It's time for the grand unveiling of money. But before we get to that, here I go once again with the email.
Mostly Uncle Frank:And First off. First off, we have an email from Richard, also known as Trogdor the Burninator, oh yeah. At least that's what he put in the subject line of his original message.
Voices:You can't handle the trapdoor.
Mostly Uncle Frank:And Richard writes.
Mary and Voices:Hey, Frank, you've responded to a previous email of mine on your Risk Parity podcast and I really appreciate the response. I'm running a lecture series shortly which will produce a fairly significant income and want to send a portion of all lectures income to your organization.
Voices:Yeah, baby, yeah.
Mary and Voices:Can you please shoot me an email to help set up the donations? Also, while I live in Spain half the time, I live in the DC metro area the other half and would love to buy you and your wife a nice dinner, whiskey included, sometime.
Voices:I guess don't a bucket for me, sir.
Mary and Voices:Please message me back when you get a chance so we can organize a fun time meal and continuing donations to a worthy cause. The best, jerry, the best.
Mostly Uncle Frank:Well, richard, I'm overwhelmed Again, and yes, that was an improvement.
Mary and Voices:I think I've improved on your methods a bit too.
Mostly Uncle Frank:For the two or three of you who don't know, we do not have any sponsors on this podcast, but we do support a charity. It's called the Father McKenna Center and it serves hungry and homeless people in Washington DC. Full disclosure I am on the board of the charity and am the current treasurer. But if you donate to the charity you get to go to the front of the line. There are generally two ways to do that. One you can go to our support page at wwwriskparryweavercom and join our donors there on Patreon. Or you can go directly to the Father McKenna website at their donation page, which I'll put once again in the show notes. But I feel like we might need even another category here notes. But I feel like we might need even another category here, a VIP category. Not only go to the front of the line, but there's a golden rope area with a red carpet Top drawer, really top drawer.
Mostly Uncle Frank:And certainly Ron from last week and Richard today would be in that VIP line.
Voices:Yes.
Mostly Uncle Frank:And so I've emailed you some information, richard, from frank at riskparodyradiocom, and we can certainly get started here on that at your leisure whenever your lecture series begins.
Mary and Voices:Have you ever heard of Plato, Aristotle, Socrates?
Mostly Uncle Frank:And it does sound like you're living a top drawer lifestyle really top drawer halftime in Spain and halftime in the US, and we would love to meet you someday. That goes without saying it's going to be very popular because one of the best things about this podcast and one of the reasons it exists, is so I can make some new friends.
Mary and Voices:You'll have to wait your turn. Sir, Are you threatening me?
Mostly Uncle Frank:So bring it on and we'll get that going.
Voices:Today, we have four appetizers, excuse me Moule mariné, pâté de foie gras, balougue, caviar, eggs, benedictine, tarte de poireux, that's liquor. Tart frog's legs, amandine or oeuf de caille, richard Shepard, c'est-à-dire little quail's eggs on a bed of pureed mushroom. It's very delicate, very subtle. I'll have the lot.
Mostly Uncle Frank:Thank you for your generosity and thank you for your email. Second off. Second off we have an email from Robert. Looks like you've been missing a lot of work lately. I wouldn't say I've been missing it, bob and Robert writes.
Mary and Voices:Hi Frank and Mary. What's your take on the latest Big Earn post, where his study shows that the cowbell doesn't work as in the past and that if you have been using it in this century, you're not better off at all, which the data seems to corroborate? That's not how it works. The latest tools fund strategies that are more in line with investing in the 2020s. Since SCV hasn't done well for quite a long time now, is it still worth using it, assuming?
Mostly Uncle Frank:the quite old 1992 Fama-French study. Thanks, robert. Well, before we get into this, robert, I have to ask you did you actually look up the data for the 21st century to see whether small cap value underperformed or outperformed the S&P 500 since 2000. I'm not sure you did, or you might not be writing this email.
Mostly Uncle Frank:Stupid is what stupid does, sir, but we'll get to it. So I believe you're talking about the early retirement now post from December 2nd 2024, which is really kind of summarizing a spat between Big Earn or Karsten Jeska and Paul Merriman and talks a lot about Merriman's portfolios and his critiques. Now, actually, paul Merriman has recorded a podcast all about that, actually a podcast and a half, and I will link to those in the show notes because there's kind of a blow-by-blow deconstruction there. But let me give you my take and a broader discussion of the subject of gurus and whether and when you should follow them or not.
Mostly Uncle Frank:First, from my perspective, what Paul Merriman and Karsten Jeska are arguing about here is actually the wrong question. While it's an interesting question as to whether small-cap value will outperform the general market in the future, the more interesting question from a diversification, portfolio construction and higher safe withdrawal rate perspective is whether it is sufficiently diversified from something else you might pick to cause you to have lower volatility and a higher safe withdrawal rate and perhaps a higher overall return. Because we know from the math of modern portfolio theory, if you have two assets that have the same general return profile but they perform differently at different times, the combination of the two of them will perform better than either one of them by itself. So it doesn't really matter whether small cap value outperforms large cap growth or the S&P 500. Outperforms large cap growth or the S&P 500. So long as they are sufficiently diversified and they perform about the same, you will get an advantage out of holding both.
Voices:That's the fact, Jack. That's the fact, Jack.
Mostly Uncle Frank:And what I found is true is that you've hold about half growth in your portfolio the stock portion and half value in the stock portion of your portfolio. That tends to improve safe withdrawal rates whether or not the particular funds are outperforming the other ones or not. So in a sense, this is kind of an academic question. It is more interesting if you're talking about accumulation portfolios than it is for drawing down on. I'll see if I can dig up the link to Shannon's Demon, which is a discussion of the mathematics of this and why it is superior to hold two separate investments that are diversified, that have the same return profile, than just holding one alone. And that's what I really care about, because my interest is having a higher safe withdrawal rate. Any added performance on a return basis would just be a bonus. So when I look at articles or blog posts like the one we're talking about here, I tend to treat them as I did in my law practice and most of my law practice was involving cross-examining financial and technical experts, was involving cross-examining financial and technical experts and so the first thing I would look at when looking at something like this is to look at their assumptions, because generally, if you're going to critique something, the first thing you should go at is the assumptions, and if the assumptions are correct or valid, you have a harder job. If the assumptions are not well formed or inapplicable, then it becomes a much easier job, because you basically just cut the legs off the stool to begin with and it collapses and you don't really need to focus on the details after that because it's a garbage in, garbage out operation. Now this article falls into the latter category because of its faulty assumptions. So let me just read to you what I'm talking about.
Mostly Uncle Frank:This is from the article for context Quote. To give credit where credit is due, small cap value stocks have had a fantastic run since 1926. A small cap value fund would have significantly outperformed my go-to index, the S&P 500, and its precursors, which I use for my safe withdrawal rate research. Of course, to my knowledge, there were no low-cost small-cap value index funds before July 2000 when iShares launched its iShares Russell 2000 value ETF, iwn unquote. And so the whole analysis Carson's making in this article is based on this assumption and the use of IWN as the index for this. And he says, to his knowledge, there were no low-cost small-cap value index funds before July 2000 when IWN was launched.
Mostly Uncle Frank:He's got one of two problems here, maybe both. Either he's incompetent and can't figure out when other index funds were launched, including ones that were launched prior to July 2000. Or he's intentionally trying to deceive us. I hope it's the former and not the latter, but I have a hard time believing that he's actually incompetent, since he's got a CFA and has been doing this kind of work for at least a couple of decades, since he's got a CFA and has been doing this kind of work for at least a couple of decades.
Mostly Uncle Frank:So anyway, it is very easy to look up the history of funds, and the four funds that are relevant to this discussion are IWN, which did originate on July 2000. Ijs, which originated on the same day in July 2000. Visvx, which is a Vanguard fund that originated in 1998. And then DFSVX, which is a dimensional fund, that originated in 1993. Now, in terms of what indexes they follow, iwn follows the Russell 2000 value index, ijs follows the S&P 600 small cap value index and VISVX follows the small cap value CRSP index. Dfsvx, the dimensional fund, follows its own index.
Mostly Uncle Frank:So if he was legitimately trying to use the oldest of the funds, he would have chosen DF-SVX as the reference index, and if he's working on the presumption that that is not close enough to an index fund, then the next choice should have been VIS-VX, which is based on the CRSP index, and that actually makes the most sense because the data that goes back to 1926 is CRSP data. And if he rejected both of those, he could have chose IJS, the S&P 600 small cap value index, because it's the same age as the IWN fund in terms of having a fund. But it's pretty clear he was not actively trying to use the oldest fund because he's using the youngest fund and so that assumption is false. But there is a reason you would use the IWN fund as opposed to the other three if you were trying to show that small cap value did not perform well, and that is because the IWN fund performs significantly worse than any of the other three options. I will link to a test folio analysis of the four funds and you can see as long as all four of them have existed, which is since July 2000. Iwn has a compounded annual growth rate of 8.69%. Ijs has a compounded annual growth rate of 9.46%, visvx has a compounded annual growth rate of 9.8% and DFSVX has a compounded annual growth rate of 9.8% and DFS-VX has a compounded annual growth rate of 10.4%. So all of those other funds or other options which are just as old or older than IWN have a better performance.
Mostly Uncle Frank:And if he was actually doing what he said he was doing, he would have chosen one of those for his analysis.
Mostly Uncle Frank:Doing what he said he was doing, he would have chosen one of those for his analysis.
Mostly Uncle Frank:So what he's clearly done here is created a straw man or put a thumb on the scale to make his analysis of small cap value look worse than it should look if he was being honest about which fund he was choosing. This also plays into the fees being charged against the fund, the pseudo fund he created, because he puts an expense ratio on the pseudo IWN thing that he created of 0.24, which you can find. Yes, that's true, but if he were to use the older fund like VISVX, were to use the older fund like VISVX, the expense ratio of that is 0.07. So he's also made the fund effectively worse by picking one with a higher expense ratio. And if you were doing this prospectively today, you could pick the ETF's VBR, which is the same thing as VISVX, or the ETF VIOV, which is the same thing as the ETF IJS and have much lower expense ratios than the 0.24. So, again, this is putting a thumb on the scale or creating a straw man to analyze.
Voices:I haven't got a brain, only straw. How can you talk if you haven't got a brain? I don't know, but some people without brains do an awful lot of talking, don't they?
Mostly Uncle Frank:yes, I guess you're right just knowing those two things, you pretty much have to throw the whole analysis out and it's gone poof because it's not unbiased. It's a dishonest skeptic analysis is what you would call it. This particularly plays in if you look at the most recent performance of these funds, because that is actually where IWN very much underperforms in the past five to ten years with the other funds. So just knowing that and seeing that, you can see why you need to disregard this analysis. If you want more gory details, go listen to Paul Merriman's podcast. But I have to tell you that the articles on this site Early Retirement Now are kind of hit or miss. It's like the girl with a little curl in the middle of her forehead when she's good she's very, very good and when she's bad she's horrid. A lot of the blog posts there are like that. They're either very, very good or they're horrid. This one falls into the horrid category. Very, very good ones are like safe withdrawal rate, number 34, the 100-year analysis of gold, showing that if you add gold to a portfolio it improves the safe withdrawal rate. There was a nice, excellent article, a critique of Scott Sederberg's article about the misuse of data and that nonsense analysis with foreign data that we've previously beaten to death like a dead horse here, and we talked about Biggern's critique of that in episodes 319 and 341, where he noted that some of the data being used was pre-World War I data that he thought was going to be irrelevant to modern analyses. One of the founding articles on the site stated April 15, 2016. And this is the first one where he comes out and says that you can use a CAPE ratio to decide whether you should make your safe withdrawal rate. Less was wrong, and the mad scientist was wrong to quote him when he said that there's only been really four bad periods in the modern era of finance for safe withdrawal rates. But actually that's correct, because the modern era that being talked about is the one since 1926. That's for where you have the CRSP data. That is really the reliable data.
Mostly Uncle Frank:Because there are two problems with the article to begin with. The first one is that CAPE ratios are not stable and they've been increasing over time on average. Michael Batnick just wrote a great article about this last month about how he was deceived into trying to do things with Cape Ratios and, like just about everybody that's tried to use that over the past 15 years, has given up on it and abandoned the idea that you were going to make actual predictions and make market moves. Doing that. That is an academic exercise. It's not something that you should be using to decide what to invest in or how to organize your portfolio or what your safe withdrawal rate should be. The other problem is a bad data problem, and it's not that the data is completely horrible. It's just not very usable for deciding how to invest today and what that data is. It's the data that goes back to 1871, from 1871 to 1926, that was brought together by Professor Schiller for his academic studies. Now, bigg-earn's entire analysis of the CAPE ratio and why he thinks it's relevant, comes out of a use of the Seafire Sim calculator in this article on April 15, 2016, which employs all of that data going back to 1871, makes the average CAPE ratio look lower and also makes safe withdrawal rates look lower.
Mostly Uncle Frank:But the reason you would never use that pre-1926 data for this purpose deciding what to invest in today is that it was never constructed on an index to begin with. It's a hodgepodge of stuff and, in fact, the stuff that goes back to the 19th century is often just based on the prices of 25 to 30 companies, because there wasn't even one consistent stock exchange at that time. There were two in New York, one in Boston, one in Philadelphia and one in Chicago. Those were the major exchanges, and then there were a whole bunch of minor ones. There were no indices that you could use. This was also an agricultural society. The United States did not become even half electrified until the 1920s, and so almost all the companies that were on the stock exchanges were either railroads or some large industrial kind of company like an ironworks or a steel mill.
Mostly Uncle Frank:So for the exact same reason that Karsten criticized the Cederberg paper and was correct in that critique, he should have excluded and not used that pre-1926 data in any of these analyses, because that data is extremely limited, certainly doesn't have any factors in it and it doesn't even really kind of match any indices.
Mostly Uncle Frank:Now, it's interesting it was around that time that tools like Portfolio Visualizer and Portfolio Charts first became available, and I have to believe if he was using those tools and not this simplified CIFIRE SIM thing with this very narrow but old data set, that he would have come out to different conclusions, because you also come out with different conclusions if you start in 1926, which is the first time you have robust data the CRSP index.
Mostly Uncle Frank:This is still an endemic problem with a lot of personal finance calculators, including Seafire Sim, that's never updated its data to expand it so that you can analyze different factors or different kinds of investments, and FiCalc has the same problem.
Mostly Uncle Frank:You need to look at these calculators if you're going to use them and see what kind of data sets they're working with. What kind of data sets they're working with, because this one data set with just kind of stocks, bonds and cash in it and maybe gold and maybe not, that is not a good data set to be using to decide what to invest in in your retirement portfolio. You can't even analyze a lot of this stuff. And just one final kind of note and observation on this segment or subsegment when I was running those four small cap value funds through Testfolio to see their performances, I also put in the S&P 500 fund, vfinx to compare with them and just because of when the last ones came into being in 2000,. If you look at the performance from that date until now, the S&P 500 fund underperformed all of the small cap value funds.
Voices:Surely you can't be serious. I am serious.
Mostly Uncle Frank:And don't call me Shirley. The S&P 500 underperformed all of the small cap value funds. But that's not the kicker. The kicker is this Carson was born in the 1970s, so the very worst period in his lifetime for the stock market was 2000 to 2010. This is also right after the highest CAPE ratio for the S&P 500 ever recorded on record. But you know what the solution was at that point in time for a stock portfolio it was to hold some value, because if you would have mixed the S&P 500 with the value during that period, you wouldn't have had a problem. If you were drawing down in the portfolio, you could have taken out more money. You wouldn't have had to reduce your safe withdrawal rate for some janky CAPE ratio analysis. You wouldn't have had to reduce your safe withdrawal rate for some janky CAPE ratio analysis. You wouldn't have had any of those problems.
Voices:Forget about it, because in fact, holding value-tilted stocks in a portfolio automatically reduces the CAPE ratio of the stock portion of the portfolio. Anyway, I'm telling you, fellas, you're going to want that cowbell, and that is how diversification really works.
Mostly Uncle Frank:You have multiple funds. You rebalance them. They perform differently at different times if they are diversified and you rebalance them and combine them with some other assets and then you have a well-diversified portfolio. Because you do not have a well-diversified portfolio, because you do not have a well-diversified portfolio if it's 75% S&P 500 and some cash and bonds, forget about it. That is just a weak accumulation portfolio. That's all it is.
Voices:Guess what? I got a fever and the only prescription is more cowbell.
Mostly Uncle Frank:But let's leave these details aside for now and talk about a broader question, which is whether you and by you I mean me actually should be using the examples set by these guru types which we'll go through a few of them as your role model for retirement, what you want to hold in retirement and how you want to spend in retirement. And to do that, you have to apply those principles that Bruce Lee states and that we've quoted before, which is, whenever you are given some information from an expert, it is up to you to absorb what is useful, discard what is useless at least to you and add something that is uniquely your own. And so what we're going to talk about here is what I think we should discard or at least I think I should discard from a lot of these gurus, because the truth is, with almost all of them people in personal finance space that have written a bunch of stuff or become famous they're all hoarders. They don't want to spend their money, and it's either from fear or it's either part of their identity. But I've looked at this over the past 15 years, when I first started planning a retirement, thinking, well, maybe I could just copy something that one of these people has already written about. If I just do what they did, maybe things would work out well. When I started looking at what they did, what I realized is they had no interest in actually spending their money in retirement and so had not constructed anything that was designed for spending money in retirement, and instead we're just all over the place. But let's talk through them so you can understand what I mean here, and we'll start with Paul Merriman and Carson Yeska, paul Merriman and Karsten Jeske.
Mostly Uncle Frank:Paul Merriman has been very transparent about his entire financial history and career, and he had actually made enough money to retire at about age 40 in business and after that then took on a second career as a financial advisor and created a financial advisory firm. But here's what his strategy was when approaching retirement, he decided that he wanted to have twice as much money as he would actually need to retire Twice as much money, even though he wasn't planning on spending it and in order to do that, he decided to work until age 70 voluntarily, and so now, at age 80, he has three times as much money as he needs, and he has said this all in his podcast and other interviews. And so he's ended up with multiple portfolios. He's got one that they take from generally, which is his Merriman Ultimate 10-fund portfolio on the stock side and then it's 50% treasury bonds on the bond side of it. That's one of his portfolios. He's got a whole other portfolio that is still managed by his old firm and that portfolio is managed on a market timing basis.
Mostly Uncle Frank:But the question I had when I was looking at what he was doing was first, did I want to work until age 70 so I could accumulate twice as much as I actually needed, or would I rather not work an extra 10 years or take that 10 years of my life between age 60 and 70 just to double my assets, even though I didn't need to, and for me that was an easy choice. Not going to do it Wouldn't be prudent at this juncture. I want the time. I don't need to have another extra pot of funds that I'm not going to use just to have, and I'm not going to devote 10 years of my later life to making sure that happens. And most people would make the choice that I made, because I can tell you that it is actually relatively rare for people to work to age 70 voluntarily. A lot of people will work until age 70 because they don't have a choice, because they haven't accumulated much of anything. But the percentage of people that work to age 70 voluntarily is only like 1% to 2%, according to the AI bots I've consulted, but I wasn't sure whether that was a percent of the whole population or the working population. Anyway, it's a very small number, and so what he did is not the choice that almost anybody makes. Most of us don't want to work until age 70, no matter how much you pay us, or it'd have to be more than just doubling our assets for money we don't need. But when he talks about that, he's very happy with his choice and it was his choice, and there's nothing wrong with that. If that's what you choose to do, for whatever reasons you have, but it doesn't apply to most people and it doesn't apply to me. All right.
Mostly Uncle Frank:What about Karsten Jeska's plan or example as a role model? Well, he seems to have acted out of fear CAPE fear, if you will. He decided that, based on this not very good analysis from 2016, that because the CAPE ratio was quote high at that time not that it isn't much higher today, because it was high at that time. According to him, he could only use a 3% withdrawal rate. In fact, he was running around telling other people to do that. If you go to the Go Curry Cracker blog, you'll see entries from about then at that time.
Mostly Uncle Frank:I was reading all these blogs at that time. That's why I know where these bodies are buried. He was telling Jeremy over there oh no, no, you can't be spending 4%, you've got to spend 3%. There's no way. Look at this CAPE ratio. It's terrible. And he decided that he was only going to spend between 2.5% and 3% of his portfolio. Now he has been able to supplement that with a trading strategy, an options trading strategy. But I view that as a side hustle and I believe he does too, because he's recently registered himself as a registered investment advisor with the SEC so that he can take in money and run this options trading strategy with it for a fee.
Voices:They're sitting out there waiting to give you their money. Are you going to take it?
Mostly Uncle Frank:And we can link to that registration in the show notes, although he's mentioned that in one of his more recent posts, and that's how I know. Anyway, we're nine years on from that. I should say seven. He actually retired in 2018.
Mostly Uncle Frank:And the dire predictions using the CAPE ratio obviously did not come true. We've had a better performance in the stock market than average over the past seven to nine years, not a worse one. So that indicator as an indicator was just wrong, wrong. And meanwhile, because he restricted his spending so much and essentially only lived on his side, hustle options trading and the dividends from his investments, he has not had to sell one share of his stocks, not one, and I don't know how much he's got now, but it's got to be two or three times what he started with, Although he could have been spending that money. Hopefully he'll start doing that because he's still a young guy, but the CAPE ratio is a lot higher now.
Mostly Uncle Frank:And, just for edification, he has said that his portfolio is similar to a 75-25 or 70-15-15, that being S&P 500 bonds and cash or S&P 500 in bonds. What he really holds is more complicated than that. In his bond selection, he holds a lot of individual preferred shares and municipal bonds and other things like that, but his stocks are basically index funds, according to what he said. In any event, it didn't matter what he was holding because his withdrawal rate was so low it was going to survive in almost any circumstance and his portfolio was going to continue to grow in almost any circumstance, and that's what's happened. So I have to ask myself, when I was looking at that option which I was in 2016 to 2018, reading all these blogs about what other people were doing whether that seemed to be a good role model. And I could see that it was not a good role model. And he was not modeling the right things and not using the right calculators and not trying to spend more money. He was trying to spend less money and look for reasons not to spend money, and so he hasn't, but because he didn't want to or didn't feel like he could.
Mostly Uncle Frank:Does that mean I can't or somebody else can't? No, it doesn't. It means you probably just need to make different choices as to what kind of portfolio you want to hold. But let's move on to a few others. Let's next look at a couple of famous Boglehead types Rick Ferry and Rob Berger. They come in twos, don't they? Always?
Voices:two. There are no more, no less.
Mostly Uncle Frank:A master and an apprentice, and the source material for this is largely an interview that Rick Ferry did of Rob Berger a couple of years ago and then the excess returns interview of Rick Ferry, and I'll link to both of those in the show notes. Now Rick Ferry holds one of his Core 4 portfolios. He uses the Total Economy version and there are five or six different versions of a Core 4 portfolio and I'll see if I can link to that website in the show notes too. But his retirement plan is very similar to Paul Merriman's in that what he plans to do is work until he's 70. And then after that, because he's got a pension and will be taking Social Security, according to him he can just live on that money pensions and Social Security and so his withdrawal rate from his retirement funds is going to be zero, zero percent. Now, honestly, when he said that, I hoped it wasn't true that he's got some plan to start a foundation or give it to his kids or something with it before he dies. But that's not what he said. So at least for the purpose of this discussion, I have to take him at his word. He's going to live off only his pensions and Social Security and not spend any of the money he's accumulated throughout his life in investments. To me that doesn't make any sense. That's a hoarding behavior and, again, I'm not somebody who wants to work until they're 70 and then not spend the money I've accumulated. Now he is likely one of those people that likes to work and that's fine for him. Those people are not that common. I knew a number of them in my law practice people who are still working well into their 80s in that profession but they're very rare and they are not good models for most people going into retirement. But again, because he's not planning on spending any of his money, it doesn't matter what kind of portfolio he's holding, whether it's a core four or some other Bogle head thing, it just doesn't matter. And so I could not use that as a role model, because I actually want to spend my money and I actually started doing it in my late 50s instead of at age 70. So that was another one that was not a good role model for me.
Mostly Uncle Frank:And I looked at what Rob Berger was doing, because he and I have legal careers that started at about the same time, but there was a difference there in that he has said that he didn't really like practicing law. In the end, and in fact, the last five to 10 years, he was just working in that because he felt he had to. He had already started his blog, his financial blog, which he eventually sold, and so I think he first retired in some time between 2016 and 2018. I haven't looked back at that, but basically what he also says is that he's retired and unretired about three times now. Why he was good enough to be honest about it in that interview that I mentioned. The reason he unretired, or one of the reasons in terms of the finances of it, is because he was scared. He says I was scared after I stopped getting an income and I was trying to live on this and he tried to use some bucket strategy and realized that wasn't helping, ditched that. Then he went to work for Forbes for a while and now he's got, I think, two or three businesses going on. One is the YouTube channel that he's got that he seems to really enjoy. He's got another business involving looking up credit card stuff and bank stuff for people. So he's still working a lot and still making money off of those things, and that's almost a decade after he was supposedly retired from his legal career, and so what he holds as a portfolio is basically a kind of Boglehead two or three fund. It sounded like he had a core four thing going on for a while and has simplified that, but it doesn't appear that he's really spending that money because he's got these side incomes going on, and so when I look at that, well, that's fine for a lot of people Maybe you do want to have a second career and still essentially be working full-time on stuff and making money at it.
Mostly Uncle Frank:But that was not the role model that I wanted to follow and, unlike him, I liked practicing law, so I didn't feel like I was needing to leave that to go and have some other real career. What I didn't like about it is it took up all my time and so I couldn't do anything else. So I knew at the 20-year mark that I needed to get out of the full-time legal practice within the next 10 years or so and that I did plan on living on our assets largely, and any other income was going to be accidental or supplemental, as the case may be, which again meant I needed to construct a portfolio that was appropriate for drawing down money off of, and not some simplified thing I just wasn't going to touch, or wasn't going to touch very much. But I hope you can see the pattern here, because this is what I discovered over the past 15 years of trying to figure out what kind of portfolio I should hold in retirement. The first thing I needed to determine was what kind of retirement I was going to have, and what I figured out was that my retirement was going to be kind of more of a normal live-off-your-money retirement and not the kind of retirement that most of these guru types were going to have, which is don't spend money in retirement, and so it really matters what my portfolio is, whereas it doesn't really matter what's in their portfolios. So they couldn't really be retirement role models for me portfolios. So they couldn't really be retirement role models for me.
Mostly Uncle Frank:And let me just mention a couple others in passing, who I call these days the tips ladder twins, and that is a joke. We're talking about William Bernstein and Alan Roth. Both of these are very famous writers in personal finance who've written a lot of excellent material about the subject matter. But it's interesting my favorite book from William Bernstein is not actually one of his traditional finance ones, but a book called the Delusions of Crowds why People Go Mad in Groups published in 2021, which is kind of an update or sequel to Charles Mackay's famous Popular Delusions and the Madness of Crowds published in 1841, and really observes that human beings haven't changed all that much.
Mostly Uncle Frank:Anyway, I don't want to belabor this too much, but what I wanted to point out here was that both of these gentlemen are well over-saved, and have been for some time, and at some point in 2022 and 2023, both of them had this bright idea that what they really needed to do was take a portion of their portfolio that they didn't seem to be using anyway and create a 30-year tips ladder out of it.
Mostly Uncle Frank:Alan Roth used a million bucks out of his stash. I don't know how much William Bernstein used, but considering the financial positions they were in, I mean, unless you really found this entertaining, there was really no point to it. This is what hoarders do when they financially flex. They don't go out and buy fancy cars or vacation homes. They create elaborate financial creations for everybody to look at and ooh and ah, and I find this behavior is very common amongst hoarder types. Even if they have the simplest portfolio you can imagine and they claim that they believe in simplicity in their portfolios, they often run off and create these monstrosities composed of buckets, ladders, hoses, flower pots.
Voices:But what about your grandfather's work, sir? My grandfather's work was doo-doo.
Mostly Uncle Frank:And a tips ladder is really complicated especially if it's 30 years long really annoying to manage and almost certainly unnecessary for almost everybody. Michael Kitsis was asked about this at the time and he says that it's basically a waste of time, that if you have that much money that you could construct a tips ladder for living off of it or for whatever reason, you could easily just hold any kind of stocks or whatever and ride out any downturns and the stocks would take care of your inflation problems anyway. So there really isn't much of a purpose to that, at least something that complicated. I mean, if you wanted something simple that was going to last for your lifetime, you'd be better off buying an annuity, and if you're worried about inflation, don't spend it all on the first annuity Ladder, annuities over time. But you really shouldn't be relying on bonds to deal with inflation anyway. That's why you hold stocks and other assets, especially certain kinds of value-tilted stocks, managed futures commodities, gold, all of that sort of stuff, and they're really inefficient when you think about it. It works well for a time period with a gap, say between age 60 and when you're going to take Social Security and you need to fill in some income that's coming there, that's going to be replaced by something else. But if you're just constructing some 30-year thing unless you know when you're going to die, it's going to be inefficient, because either you're going to die early and then somebody else has to deal with this monstrosity, which is not good for them. Either Hopefully, they can dispose of it and invest in something sensible, or it's going to run out before you die. Now, in Bernstein's case, I don't think it will run out before he's going to die, because it's going to take him to age 104. But does anybody really need a tips ladder that takes you out to age 104. I do not think so.
Mostly Uncle Frank:I do find it interesting, though the copycat-ness of this that for a lot of people, when they see a famous guru doing something, it becomes monkey. See, monkey, do I'm not a smart man. So I had dinner with some Bogleheads we're at a conference a couple of years ago, and one of the people at the table was talking about his tips ladder and how he had constructed it, and woo-woo, wasn't that interesting. And so I asked him well, that was all fine and good, but how is he going to rebalance that with the rest of his portfolio? Because once you construct a ladder, you can't really rebalance it. And his answer was well, I'm not going to spend any of the rest of the portfolio, which is exactly my point here. Why are you hoarding all this money? What's the point of it? Just so you can flex with a tips ladder and talk about it at a Boglehead conference.
Voices:Looks like I picked the wrong week to quit amphetamines.
Mostly Uncle Frank:In my view, there are better things for us to be doing with our time and our money than financial flexing with complex things that people don't really need. You may differ, and that's fine. I will leave you to your hoarding, but for me this does not make a good role model for handling money in retirement. But I am more of the Chuck Feeney mindset. Let's try to give away as much as possible while we are alive so we can see the good that's done with it. Anyway, I was thinking after last week talking about the two financial advisors saying that their biggest problem with their clients is that they can't get them to spend money and they're just hoarding it, and it made me realize that if any of the people we've been talking about had a financial advisor, I'm almost positive that that financial advisor would tell them you're not spending enough money. You are one of my problem children who can't spend their money.
Voices:Donate to the children's fund. Why? What have children ever done for me?
Mostly Uncle Frank:And what are the reasons people do that? As the two financial advisors said last week in our episode 399 that we referred to, it's generally some combination of fear and identity. Either they're afraid to spend money and or when they look in the mirror, they want to see somebody who has always got number going up, because that's their priority.
Voices:Another idol has replaced me in your heart, a golden idol. It's singular. The world that can be so brutally cruel to the poor professes to condemn the pursuit of wealth. In the same breath, you fear the world too much, with reason. But I am not changed towards you, aren't you? You know I'm right, then I must bow to your conviction that you are. May you be happy in the life you have chosen. Thank you, I shall be.
Mostly Uncle Frank:But I'll end with this. I think also, in many cases, even if they thought about changing their approach, the reason they don't is procrastination and inertia. And this actually goes back to that safe withdrawal rate series number 34 from Karsten, and he wrote this long article showing that, despite his initial belief that in fact gold did improve the safe withdrawal rate of a portfolio. And then he asked himself, why don't I get some gold? And the two reasons he gave for not doing that, even though it would increase his save withdrawal rate, were procrastination and inertia Inconceivable, otherwise known here as the foolish consistency that is, the hobgoblin of little minds adored by little statesmen, philosophers and divines. So hopefully you found that interesting and I didn't piss too many people off, although I'm sure I did.
Voices:Am I fucking you.
Mary and Voices:No means I'm fucking you.
Mostly Uncle Frank:I gotta be good at something right.
Voices:What is this Lunker? Some kind of fun house. Why having fun?
Mostly Uncle Frank:And thank you for your email Last off. Last off, we have an email from Jacob Something big, something mega, something copious, something capacious, something kajanga.
Mary and Voices:And Jacob writes Hello Frank Jacob here. I just started listening to you about 20 months ago and I'm only about a quarter of the way through your episodes. I would love to get your thoughts on short-term treasuries and money markets and how they might fit into a risk parity style portfolio. I have heard you talk about money markets and short-term treasuries as a cash management tool, as you do in the golden ratio sample portfolio, but outside of that, is there a good reason to holding treasuries less than one to two years of duration on their own merit? I am in my decumulation phase and my overall target bond allocation is 30% 25% in SCHQ and 5% in SCHO. My rationale is that short-term treasuries have a fairly low correlation with most other asset classes, including long-term treasuries. Have you done a David Stein's 10 questions type episode on cash and cash equivalents and I missed it. Thank you for all you do, jacob and I missed it.
Voices:Thank you for all you do, Jacob.
Mostly Uncle Frank:Well, jacob, no, I have not done a 10 questions on this, but the answer is pretty short that no.
Mostly Uncle Frank:They are not a good idea for a large allocation in a portfolio, especially when you're talking about things that are less than two years duration, and the reason for that is they tend to just be a cash drag on the portfolio because they're so close to cash and all cash does in a portfolio is reduce both the volatility and the returns proportionally, so you're not getting the same return or a little less return for a lot less volatility, you're just getting less of a portfolio that, if you took away the cash that's in the portfolio, constructed a new portfolio out of the rest of it, that portfolio would perform pretty much the same as the one with the cash in it, except it would be smaller.
Mostly Uncle Frank:So what you can use it for is to take some of the volatility out of your portfolio, recognizing that you are just dampening the whole thing down.
Mostly Uncle Frank:And if you go all the way back to Bill Bengen's original paper in 1994, part of the analysis he did there was with T-bills, which are very similar to these short-term bonds, and the question was what kind of effect did T-bills have on a safe withdrawal rate and what he learned from that exercise is that if you have more than about 10% of T-bills or other cash equivalents in a portfolio, it tends to drag down the portfolio overall as well as the safe withdrawal rate, and that observation or research has been duplicated many, many, many times, and you can even do it yourself in Portfolio Visualizer or Portfolio Charts or other modeling tools.
Mostly Uncle Frank:But even though the research is very clear and has been very repeated very many times, there does seem to be some kind of cash disease in the air these days, where people think that by constructing some kind of window dressing involving buckets, ladders, flower pots or other piles of cash, some up to five or ten years worth of cash is going to help you with your safe withdrawal rate and sequence of returns risk, and the answer is it's really not safe.
Voices:No way.
Mostly Uncle Frank:All that's really going on there most of the time is you just have somebody that's over-saved, so they have their real portfolio and then they have this extra pile of cash that they slap on the front of it. But that's just saying you're taking a lower safe withdrawal rate to begin with on the whole pile. Specifically, having three to five years of cash and a bunch of stocks in a portfolio is a bad idea and that portfolio historically has had problems with its safe withdrawal rate because you are not worried about a average downturn, which you're really worried about. It's a decade-long downturn and that kind of portfolio does not solve decade-long downturns like the 1970s or the early 2000s. So anytime you see or read somebody saying I'm solving my sequence of return risk by having one to five years of cash lying around, they don't know what they're talking about.
Voices:Hello, hello, anybody home? I think McFly, I think.
Mostly Uncle Frank:They are solving for the easy sequence of return risk that any portfolio can survive, which is the short downturn. They're not solving for the problematic sequence of return risk, which is the decade-long multi-downturn kind of scenario like 2000 to 2010. So if you want to have a higher safe withdrawal rate, you need to keep your cash holdings and very short-term bond holdings limited to about less than 10% of your portfolio. One of our sample portfolios, the Golden Butterfly, does kind of push that to the limit, but some of those bonds there in that short-term bond fund are more of an intermediate-leaning variety when you get out to three years, and so it works fine for that portfolio because that is intended to be a very conservative portfolio that focuses on keeping drawdowns shallow and short. But I think that's kind of the upper limit of what I would do. So hopefully that helps and thank you for your email.
Mostly Uncle Frank:Now we're going to do something extremely fun, and the extremely fun thing we get to do now is our weekly portfolio reviews of the eight sample portfolios you can find at wwwriskpartyravecom on the portfolios page, and we are having a little bit more fun than most people these days, ha ha. Just looking at the markets, the S&P 500, represented by VOO, is up 2.49% for the year. The NASDAQ, represented by QQQ, is up 2.29% so far this year. Small cap value is the worst thing this year. Our representative fund, viov, is down 0.21% for the year, but that's followed by our best performer this year so far, which is gold.
Mary and Voices:I love gold.
Mostly Uncle Frank:Our representative fund GLDM is up 9.04% for the year so far. Long-term treasury bonds are also up this year. Representative fund VGLT is up 2.35% for the year so far. Long-term treasury bonds are also up this year. Representative fund VGLT is up 2.35% for the year. In the REIT category, representative fund REET is up 2.38% for the year. Commodities are also having a good year so far. Representative fund PDBC is up 3.16% for the year. Preferred shares, represented by the fund PFFV, are up 1.69% for the year and managed futures, represented by the fund DBMF, have managed to be up 1.19% this year so far.
Mostly Uncle Frank:Now moving to these portfolios. First one is the All Seasons. It's a reference portfolio. It's only got 30% in stocks in a total stock market fund, 55% in intermediate and long-term treasury bonds and 15% in gold and commodities. It is up 0.84% month to date, 2.85% year to date and 11.65% since inception in July 2020.
Mostly Uncle Frank:Moving to these bread and butter kind of portfolios, first one's Golden Butterfly. This one's 40% in stocks divided into a total stock market fund and a small cap value fund, 40% in bonds divided into short-term and long-term treasury bonds and 20% in gold. It is up 0.32% for February so far. It's up 2.93% year-to-date and up 37.85% since inception, july 2020. Next one's the golden ratio. This one is 42% in stocks divided into a large-cap growth fund and a small-cap value fund, 26% in long-term treasury bonds, 16% in gold, 10% in managed futures and 6% in a money market fund or cash. It is up 0.4% for the month of February so far. It's up 2.68% year-to-date and up 33.43% since inception in July 2020.
Mostly Uncle Frank:Next one is the risk parity ultimate. I'm not going to go through all 14 of these funds. I say 15, but there's actually only 14. Although I can tell you that Ether has been taking it on the chin the 1% in Ether that's in this portfolio, but it's up 0.6% months to date. For February, 2.8% year to date and 23.5% since inception in July 2020. Now moving to these experimental portfolios, which involve leverage funds. So don't try this at home, even though I know some of you do.
Voices:You have a gambling problem.
Mostly Uncle Frank:First one's the accelerated permanent portfolio. This one is 27.5% in a levered bond fund, tmf, 25% in UPRO, which is a levered S&P 500 fund, 25% in a preferred shares fund, pffv, and 22.5% in gold GLDM. It is up 2.04% month-to-date, 5.92% year-to-date and 7.01% since inception in July 2020. It seems to be liking current conditions. Next one's the aggressive 50-50. This is the most levered and least diversified of these portfolios. It's essentially 50% stocks and 50% bonds levered up. So it's got one-third in a levered stock fund, upro, one-third in a levered bond fund, tmf and the remaining third in ballast in a preferred shares fund and a intermediate treasury bond fund. It's up 1.66% month to date for February, up 4.3% year to date, but still down 8.14% since inception in July 2020. Next one's the levered golden ratio. This one's also having a pretty good year so far. This one is 35% in a composite levered fund called NTSX, that's the S&P 500 and Treasury bonds, 25% in gold GLDM, 15% in a REIT O, 10% each in a levered small cap fund, tna and a levered bond fund TMF, and the remaining 5% in managed futures and KMLM. It is up 0.82% month to date for February. It's up 4.84% year to date so far and up 0.2% since inception in July 2021. And the last one is our newest one, the Optra portfolio One portfolio to rule them all. This one is 16% in a leveraged stock fund, upro, 24% in a worldwide value fund called AVGV from Avantis. Then it's got 24% in a treasury strips fund, govz, and the remaining 36% is divided into gold and managed futures. It's up 0.86% month to date. So far for February, it's up 4.24% year to date and up 7.20% since inception in July 2024. It's only about seven months old and that concludes our weekly portfolio reviews. But now I see our signal is beginning to fade.
Mostly Uncle Frank:If you have comments or questions for me, please send them to frank at riskparityradiocom. That email is frank at riskparityradiocom. Or you can go to the website, wwwriskparityradiocom, put your message into the contact form and I'll get it that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like subscribe. Give me some stars, a follow or a view. That would be great, okay, thank you once. Some stars, a follow, a review that would be great, okay. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio.
Voices:Signing off no-transcript.
